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Bank of Canada Cuts rate by .25%

BOC Rate Cut
BOC Rate Cut

Well if we said it couldn’t go any lower, it just did.  Once again BOC cut its overnight rate by .25%.  Major banks got on board to lower their prime rate by .25% as well.  If not all have followed they most likely will.

The Bank of Canada cut its benchmark lending rate on Tuesday by another 25 basis points, to 0.25%, and signaled it would keep it there until the end of June of next year based on its tepid inflation forecast. It also revised its forecast for 2009 GDP to a contraction of 3% for 2009 from a previous estimate of 1.2%, followed by growth of 2.5% next year.

Meanwhile, the central bank provided a glimpse of what may be contained in its much-anticipated quantitative easing framework. The Bank of Canada said it would be changing the terms of one of its current short-term facilities, from one- to three-month terms, to six- and 12-month terms. The rollover of existing stock into longer terms, to begin next month, was necessary, it said, to keep the overnight rate at 0.25%.  The next rate review is set for June 4, 2009.

Big banks pass on rate cut to customers

The chartered banks have reacted to a move in which Canada’s central bank has cut its benchmark lending rate to an historic low of 0.25%.

 Shortly after the central bank’s decision was announced, Bank of Montreal, Royal Bank of Canada, CIBC and TD moved to lower their prime rates – or what they charge their best customers – by 25 basis points, to 2.25%, effective Wednesday.

 BOC changing its operating system 

Jacqueline Thorpe, Economics and Markets Editor, FP

 By cutting its benchmark-lending rate by an additional 25 basis points, to 0.25%, the Bank of Canada was forced to make changes to its operating system to ensure the smooth functioning of money markets. Here is a summary of the changes:
• Narrows operating band to 25 basis points, from 50 basis points. The band is now at 0.5% to 0.25%. As a result, the interest the central bank pays on excess reserves chartered banks hold at the Bank of Canada will match the benchmark rate.
• Will provide excess settlement balances – at $3-billion – in the financial system to create incentives for the overnight rate to trade at the bottom of its operating band, namely 0.25%.
• Roll over a portion of its outstanding stock in one- and three-month financing with market players, into six- and 12-month terms, in an effort to reinforce the 0.25% overnight rate.
• Reserves the right to enter into special purchase and resale agreements (PRAs) to put downward pressure on the overnight rate.

Here is a snapshot of some of the analyst reactions;

ANDREW PYLE, SCOTIAMCLEOD:  “despite the more optimistic signals lately, the global recession has intensified with more of the major economic powers now in sync.  Therefore, Mr. Carney and crew now believe that Canada’s own recession will be “deeper than anticipated” and it expects the recovery to be delayed to the fourth quarter”. 

CHARMAINE BUSKAS, TD SECURITIES:“We are of the view that the Bank may eventually employ quantitative easing, but it needs to set out a framework first, which will occur on Thursday. Once that is done, the Bank can use these alternative policy tools at their discretion”.

ASHRAF LAIDI, CMC MARKETS: Canada’s decision to target monetary reserves… is textbook “quantitative easing” (not only credit easing), which is the way the Bank of Japan announced policy easing in 2002-04.”

MICHAEL GREGORY, BMO CAPITAL MARKETS: In relation to the overnight target, the BoC

efforts (which would have forced the overnight rate to the deposit rate in any event). The Bank did not mention whether additional monetary stimulus will be required (we think it will).”QEwill still charge banks +25 bps (Bank Rate at 0.50%) on borrowed settlement balances (“reserves”) but they did not lower the rate they pay on outstanding balances (kept at 0.25%, as before). This is a strong signal that the Bank intends to add excess settlement balance to the banking system as part of its



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