Bank of Canada Statement Reflects Considerable Concern

April 21, 2009

Declaring the global recession more intense than in January and credit conditions worse, Bank of Canada officials took the following steps:

  1. Cut its overnight rate target to 0.25% from 0.50%.
  2. Cut its Bank Rate by 0.25% to 0.50%.
  3. Left its deposit rate, which determines the floor for overnight rates, at 0.25%.
  4. Declared that the overnight rate target can drop no further. Ten reductions since December 2007 accrued to a total decline of 425 bps.
  5. Made a promise, contingent on future inflation, not to begin raising the 0.25% overnight target before mid-2010.
  6. Blamed Canada’s deeper and longer recession on unforeseen delays in many countries to enact measures to stabilize the global financial system.
  7. Pushed back the onset of recovery to 4Q09 and flattened its strength.
  8. Revised the potential rate of GDP growth downward because of diminished capacity and a compromised use of human capital.
  9. Pushed back the date when a wide output gap is expected to disappear to 3Q11.
  10. Revised projected 2009 GDP growth to -3.0% from estimates of -1.2% last January and +0.6% last October.
  11. Revised projected 2010 GDP growth to 2.5% from estimates of 3.8% in January and and 3.4% made last October.
  12. Projected a 4.7% rise of real GDP in 2011.
  13. Confirmed a lower profile for core inflation and not project such back at its 2% target until 3Q11..
  14. Reduced the profile for total inflation, now expected to bottom at negative 0.8% later this year and not return to its 2% target until 3Q11.
  15. Asserted that inflation risks around the baseline forecast are tilted slightly to the downside.
  16. Pre-announced that so long as the overnight rate target stays at 0.25%, future policy statements will include verbal guidance to how much longer the rate is likely to stay at that level.
  17. Rolled over part of the Bank of Canada’s stock of one- and three-month Purchase and Resale Agreements into 6- and 12-month terms at minimum and maximum rates corresponding  to the overnight target rate and the Bank Rate.
  18. Released a schedule of such longer-term PRAs.
  19. Reiterated that the semi-annual Monetary Policy Outlook due this Thursday will have more to say about a framework for quantitative easing.

The Bank of Canada, like the Swedish Riksbank earlier today, made its biggest news by asserting that record low rates will be maintained for more than 12 months from now.  In Canada’s case, the overnight target will not climb above 0.25% for at least 14 months.  Japan went through what the rest of the world is experiencing last decade.  Insofar as Japan’s overnight target has not exceeded 0.5% since September 1995, it’s a conservative bet to promise no increase for the coming year.  It’s more far fetched that central banks like the Fed will be able to reverse monetary policy in an aggressive way.

Read today’s Bank of Canada statement by clicking here. Previous amounts and dates for Canadian easings were March 9 (50 bps), January 20 (50), December 9 (75), October 21 (25), October 8 (50), April 22, 2008 (50), March 4 (50), January 22 (25) and December 4, 2007 (25) from a cyclical peak of 4.5%. The next Bank of Canada scheduled policy statement will be on June 4 at 13:00 GMT.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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