CANADIAN PRESS
April 20, 2009
OTTAWA – After more than a year of cutting borrowing costs to boost the slumping economy, the Bank of Canada may hold the line on interest rates when it announces its rate decision Tuesday.
But there are other things the central bank is expected to do to boost the supply of money into financial and credit markets.
Economists seem split on whether another cut is needed, with some saying it would stimulate more borrowing if implemented with other credit-enhancing moves by the Canadian central bank and others dismissing the effectiveness of rate cuts alone.
With the trend setting overnight bank rate at half a point, Bank of Canada governor Mark Carney “has exhausted conventional remedies,” says Avery Shenfeld, chief economist at CIBC World Markets.
“A further cut to a quarter-point overnight rate would be futile on its own, and would squeeze margins in the banking system, and we therefore expect Carney to hold the target at 0.5 per cent.
“More effective would be simply to remind markets, again and again, that short rates will be staying low for the foreseeable future, likely right through 2010 if the real GDP recovery speed is seen at two per cent or less.”
Michael Gregory, senior economist at BMO Capital Markets, said “it’s better than even odds” there will be a quarter-point cut Tuesday.
“The market is not sure. I think they will cut but they will have to do something else with it as well.”
Gregory says the central bank may alter some of its other relations with the country’s big banks and other financial companies – something he calls settlement balances – to encourage them to lend more to consumers and businesses or buy securities, helping to loosen up the credit crunch that has been a large hurdle to economic recovery in corporate Canada.
As well, the central bank “can buy assets and then pay for them by printing money or creating money,” says Gregory.
“We can buy assets, maybe asset-backed commercial paper, and we will pay for it by printing money. Well, guess what, all that money we print has a potential for circulating in the economy to further expand the monetary supply.”
While observers will be watching Tuesday’s bank rate, all eyes will be on the Bank of Canada’s latest economic outlook that will be released Thursday.
The bank’s Monetary Policy Report will give us the Bank of Canada’s view of how deep the recession will be and when economic recovery is expected.
The January report predicted recovery will be strong next year, but Shenfeld believes this week’s assessment will offer “a more sobering outlook”on Canada’s economic prospects than the January update.”
Some economists predict the eight per cent jobless rate will surpass 10 per cent by the end of the year and about 600,000 additional jobs will be lost in the economy. Reduced trade with the United States, weak financial markets, the credit crunch, falling commodity prices and the restructuring of the manufacturing sector are all taking their toll on the economy.
“Expect governor Carney and his team to say, in effect, ‘never mind’ about what they said about a brisk economic rebound in 2010,” Shenfeld said. “That was based on a too-rosy reading of the external environment, and on both the Canadian and global economies responding to monetary stimulus in the way that macro models predict.”
“Historically, deep interest rate cuts would spark a wave of borrowing and spending, and the bank’s economic model captures such impacts. But in a shock caused by excess leverage (global debt), it’s going to take a long time before we see a releveraging of the household and business sectors. Growth is likely to stay below Canada’s non-inflationary potential through 2010 as a result.”
The market is changing fast… very similar to what we saw when the market had it’s down turn back in May 2007.
