PrefBlog

The Bank of Canada has announced:

The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth. There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017, for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected.

The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada’s economy.

While inflation remains below the 2 per cent target, it has evolved largely as expected in July. There has been a slight increase in both total CPI and the Bank’s core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack. Nonetheless, there remains some excess capacity in Canada’s labour market, and wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies.

Given the stronger-than-expected economic performance, Governing Council judges that today’s removal of some of the considerable monetary policy stimulus in place is warranted. Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation. Particular focus will be given to the evolution of the economy’s potential, and to labour market conditions. Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.

As usual there are no details of how the voting went or any capsule description of the rationale for such dissent, as is routinely provided by professionally managed central banks such as the US Federal Reserve. It’s a pity that members of the grandiosely named Governing Council are so insecure!

The Big Banks hiked prime. Sadly, we do not know what has been done with the banks’ top secret internal primes or the spreads to Prime that the average customer might see on his renewal notice.

Details are:

• TD : Prime up 25bp to 3.20%
• BMO : Prime up 25bp to 3.20%
• CM : Prime up 25bp to 3.20%
• RY : Prime up 25bp to 3.20%
• BNS : Prime up 25bp to 3.20%
• NA : Prime up 25bp to 3.20%

The Bank of Canada has announced:

The Bank of Canada is raising its target for the overnight rate to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. Recent data have bolstered the Bank’s confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy. The Bank acknowledges recent softness in inflation but judges this to be temporary. Recognizing the lag between monetary policy actions and future inflation, Governing Council considers it appropriate to raise its overnight rate target at this time.
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The Bank estimates real GDP growth will moderate further over the projection horizon, from 2.8 per cent in 2017 to 2.0 per cent in 2018 and 1.6 per cent in 2019. The output gap is now projected to close around the end of 2017, earlier than the Bank anticipated in its April Monetary Policy Report (MPR).

CPI inflation has eased in recent months and the Bank’s three measures of core inflation all remain below 2 per cent. The factors behind soft inflation appear to be mostly temporary, including heightened food price competition, electricity rebates in Ontario, and changes in automobile pricing. As the effects of these relative price movements fade and excess capacity is absorbed, the Bank expects inflation to return to close to 2 per cent by the middle of 2018. The Bank will continue to analyze short-term inflation fluctuations to determine the extent to which it remains appropriate to look through them.

Governing Council judges that the current outlook warrants today’s withdrawal of some of the monetary policy stimulus in the economy. Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities.

As usual there are no details of how the voting went or any capsule description of the rationale for such dissent, as is routinely provided by professionally managed central banks such as the US Federal Reserve. It’s a pity that members of the grandiosely named Governing Council are so insecure!

As noted by Tim Shufelt and James Bradshaw in the Globe, the corresponding cut in 2015 resulted in a Prime decrease of only 15bp; this was reported on PrefBlog. Sadly, we do not know what has been done with the banks’ top secret internal primes or the spreads to Prime that the average customer might see on his renewal notice.

Details are:

• TD : Prime up 25bp to 2.95%
• BMO : Prime up 25bp to 2.95%
• CM : Prime up 25bp to 2.95%
• RY : Prime up 25bp to 2.95%
• BNS : Prime up 25bp to 2.95%
• NA : Prime up 25bp to 2.95%

The Bank of Canada has announced:

that it is lowering its target for the overnight rate by one-quarter of one percentage point to 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Total CPI inflation in Canada has been around 1 per cent in recent months, reflecting year-over-year price declines for consumer energy products. Core inflation has been close to 2 per cent, with disinflationary pressures from economic slack being offset by transitory effects of the past depreciation of the Canadian dollar and some sector-specific factors. Setting aside these transitory effects, the Bank judges that the underlying trend in inflation is about 1.5 to 1.7 per cent.
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The Bank’s estimate of growth in Canada in 2015 has been marked down considerably from its April projection. The downward revision reflects further downgrades of business investment plans in the energy sector, as well as weaker-than-expected exports of non-energy commodities and non-commodities. Real GDP is now projected to have contracted modestly in the first half of the year, resulting in higher excess capacity and additional downward pressure on inflation.
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The Bank now projects Canada’s real GDP will grow by just over 1 per cent in 2015 and about 2 1/2 per cent in 2016 and 2017. With this revised growth profile, the output gap is significantly larger than was expected in April, and closes somewhat later. The Bank anticipates that the economy will return to full capacity and inflation to 2 per cent on a sustained basis in the first half of 2017.

The lower outlook for Canadian growth has increased the downside risks to inflation. While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment. Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.

(Updated)
And the banks’ reaction is:

• BMO: Prime down 15bp to 2.70%
• BNS: No announcement Prime down 15bp to 2.70%
• CM: No announcement Prime down 15bp to 2.70%
• NA: No announcement (July 16) Prime down 15bp to 2.70%
• RBC: Prime down 15bp to 2.70%
• TD: Prime down 10bp to 2.75%; Prime down another 5bp to 2.70%

Following the Bank of Canada’s reduction of the overnight rate from 1.00% to 0.75%, discussed on January 21, there has now – at last – been a move by the banks to cut prime:

Canada’s biggest banks have started passing on some – but not all – of the Bank of Canada’s recent rate cut, lowering the interest charged to borrowers with loans and mortgages tied to the prime rate.

Royal Bank was the first to cut its prime rate when it announced it would go down to 2.85 per cent from three per cent, effective Wednesday.

The move was quickly matched by the Bank of Montreal, TD Bank and CIBC.
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However, the big banks had been slow to match the cut with a reduction in their prime rates.

Spin Mortgage co-founder Steve Pipkey says the prime lending rate offered by Canadian banks usually moves in lockstep with the central bank’s overnight lending rate and it’s unusual for banks to only partially pass on the savings to consumers.

The most recent exception was in December 2008, when the central bank cut its key interest rate by 75 basis points. The banks responded at the time with a 50 basis point reduction to their prime rates.

• RBC cut 15bp to 0.85%
• BMO cut 15bp to 2.85%
• TD cut 15bp to 2.85%
• CIBC cut 15bp to 2.85%
• Scotia cut 15bp to 2.85%
• National cut 15bp to 2.85%

Doug Alexander of Bloomberg comments:

There have been exceptions to the general rule of banks following the Bank of Canada. In December 2008, the Bank of Canada cut its overnight rate 75 basis points to 1.5 percent while the six large lenders cut their prime 50 basis points to 3.5 percent, creating a 2 percentage point margin between the two rates.

If today’s gap of 2.1 percentage point persists it would be the highest on a consistent basis since the Bank of Canada started shifting to the overnight rate as its target in 1994, according to Bloomberg data.

The Bank of Canada has announced:

that it is raising its target for the overnight rate by one-quarter of one percentage point to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
…
The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity. Inflation in Canada has been broadly in line with the Bank’s expectations and its dynamics are essentially unchanged.

Against this backdrop, the Bank decided to increase its target for the overnight rate to 1 per cent. As a result of monetary policy measures taken since April, financial conditions in Canada have tightened modestly but remain exceptionally stimulative. This is consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada.

Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.

Bloomberg comments:

The increase was the bank’s third since June, and most economists, including Durocher, now forecast Governor Mark Carney will keep the rate at 1 percent until April.

Prime followed:

• BNS, +25bp to 3.00%
• CM, +25bp to 3.00%
• TD, +25bp to 3.00%
• RY, +25bp to 3.00%
• BMO, +25bp to 3.00%
• NA, +25bp to 3.00%

The Bank of Canada has announced:

The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April MPR, with growth of 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.

Inflation in Canada has been broadly in line with the Bank’s April projection. While the Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April, the underlying dynamics for inflation are little changed. Both total CPI and core inflation are expected to remain near 2 per cent throughout the projection period. The Bank will look through the transitory effects on inflation of changes to provincial indirect taxes.

Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Prime followed:

• RBC +25bp to 2.75%
• TD +25bp to 2.75%
• BNS +25bp to 2.75%
• BMO +25bp to 2.75%
• CM +25bp to 2.75%

The Bank of Canada has announced:

that it is raising its target for the overnight rate by one-quarter of one percentage point to 1/2 per cent. The Bank Rate is correspondingly raised to 3/4 per cent and the deposit rate is kept at 1/4 per cent, thus re-establishing the normal operating band of 50 basis points for the overnight rate.
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Activity in Canada is unfolding largely as expected. The economy grew by a robust 6.1 per cent in the first quarter, led by housing and consumer spending. Employment growth has resumed. Going forward, household spending is expected to decelerate to a pace more consistent with income growth. The anticipated pickup in business investment will be important for a more balanced recovery.

CPI inflation has been in line with the Bank’s April projections. The outlook for inflation reflects the combined influences of strong domestic demand, slowing wage growth, and overall excess supply.

In this context, the Bank has decided to raise the target for the overnight rate to 1/2 per cent and to re-establish the normal functioning of the overnight market.

This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

The re-establishment of normal operating conditions is explained separately:

The Bank will conduct Special Purchase and Resale Agreement (SPRA) and Sale and Repurchase Agreement (SRA) operations as necessary to reinforce the target for the overnight rate (see Terms and Conditions). The targeted level of settlement balances will be gradually reduced to the typical level of $25 million according to the following schedule:

• 2 June 2010 – targeted settlement balances will be lowered from $3 billion to $1 billion;
• 9 June 2010 – targeted settlement balances will be further lowered from $1 billion to $200 million; and
• 16 June 2010 – targeted settlement balances will be lowered from $200 million to $25 million.

The Overnight Standing Purchase and Resale Agreement (PRA) Facility, under which Primary Dealers have access to an overnight standing PRA facility at the Bank rate, will be made a permanent part of the standard operating framework

The banks have followed:

• BMO +25bp to 2.50%
• RY +25bp to 2.50%
• BNS +25bp to 2.50%
• NA +25bp to 2.50%
• CM +25bp to 2.50%
• TD +25bp to 2.50

The Bank of Canada has announced (bolding added):

lowers overnight rate target by 1/4 percentage point to 1/4 per cent and, conditional on the inflation outlook, commits to hold current policy rate until the end of the second quarter of 2010
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of a percentage point to 1/4 per cent, which the Bank judges to be the effective lower bound for that rate. The Bank Rate is correspondingly lowered to 1/2 per cent. The deposit rate – the rate paid on deposits held by financial institutions at the Bank of Canada – is left unchanged at 1/4 per cent and provides the floor for the overnight rate. Details of the Bank’s operating framework at the effective lower bound can be found here.
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The Bank expects core inflation to diminish through 2009, gradually returning to the 2 per cent target in the third quarter of 2011 as aggregate supply and demand return to balance. Total CPI inflation is expected to trough at -0.8 per cent in the third quarter of 2009 and return to target in the third quarter of 2011. While the underlying macroeconomic risks to the projection are roughly balanced, the Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to its inflation projection are tilted slightly to the downside.

With monetary policy now operating at the effective lower bound for the overnight policy rate, it is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities. Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target. The Bank will continue to provide such guidance in its scheduled interest rate announcements as long as the overnight rate is at the effective lower bound.

I am flabbergasted at the bolding. I certainly can’t remember seeing anything quite so explicit before, although I’m sure some professional Central Bank watchers will be able to supply other examples. There are certainly implications for the relative pricing of FixedFloaters and their paired Ratchets in this announcement!

Canada Prime followed the overnight rate fairly swiftly:

• BMO cut 25bp to 2.25%
• RBC cut 25bp to 2.25%
• NA – no announcement yet
• TD cut 25bp to 2.25%
• CIBC cut 25bp to 2.25%
• BNS cut 25bp to 2.25%

In a rather grim statement, the Bank of Canada announced:

that it is lowering its target for the overnight rate by one-half of a percentage point to 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 3/4 per cent.
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The Bank’s decision to lower its policy rate by 50 basis points today brings the cumulative monetary policy easing to 400 basis points since December 2007. Consistent with returning total CPI inflation to 2 per cent, the target for the overnight rate can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up.

Given the low level of the target for the overnight rate, the Bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing. In its April Monetary Policy Report, the Bank will outline a framework for the possible use of such measures.

The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve its 2 per cent inflation target over the medium term.

Prime followed:

• RY, down 50bp to 2.50%
• BMO, down 50bp to 2.50%
• TD, down 50bp to 2.50%
• BNS, down 50bp to 2.50%
• CM, down 50bp to 2.50%
• NA, down 50bp to 2.50%

Of course, Prime ain’t what it used to be:

TD Canada is introducing a new $35 “inactivity” fee in April for customers who do not use their unsecured line of credit over the course of a year. For those who do, the interest rate is rising from 3.9% to 4.4% above TD prime, beginning on March 1. The Bank of Montreal is also raising the borrowing cost for its unsecured line of credit by 1%, rising from 2% to 3% above BMO prime, beginning on March 4.

Consumer activists have not – I believe – come up with any figures regarding just what Prime means, and whether their determination to have the banks’ prime follow the Canada rate has, in fact, resulted in lower carrying costs for prime-linked borrowers.

Plans to implement the “inactivity fee” referred to above have been dropped. Consumer activists have not yet explained their fair method of compensating banks for the capital set aside to cover unused lines of credit, but I’m sure it will magically appear from somewhere. “Invisible Good!” shrieks the mob, “Straightforward Bad!” The banks figured this out a long, long time ago.

The Bank of Canada has announced:

that it is lowering its target for the overnight rate by one-half of a percentage point to 1 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 1 1/4 per cent.
…
Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence. Canada’s economy is projected to contract through mid-2009, with real GDP dropping by 1.2 per cent this year on an annual average basis. As policy actions begin to take hold in Canada and globally, and with support from the past depreciation of the Canadian dollar, real GDP is expected to rebound, growing by 3.8 per cent in 2010.

A wider output gap through 2009 and modest decreases in housing prices should cause core CPI inflation to ease, bottoming at 1.1 per cent in the fourth quarter. Total CPI inflation is expected to dip below zero for two quarters in 2009, reflecting year-on-year drops in energy prices. With inflation expectations well-anchored, total and core inflation should return to the 2 per cent target in the first half of 2011 as the economy returns to potential.

Against this background, the Bank today lowered its policy rate by 50 basis points, bringing the cumulative monetary policy easing to 350 basis points since December 2007. Guided by Canada’s inflation-targeting framework, the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent target over the medium term. Low, stable, and predictable inflation is the best contribution monetary policy can make to long-term economic growth and financial stability.

The cut in the bank rate has been transmitted in full to prime:

• BMO, down 50bp to 3.00%
• Scotia, down 50bp to 3.00%
• TD, down 50bp to 3.00%
• Commerce, down 50bp to 3.00%
• Royal, down 50bp to 3.00%
• National, down 50bp to 3.00%

One can only speculate as to the extent, if any, of jawboning and armtwisting behind the scenes … but frankly, I was expecting to have to wait until 5pm to get the banks’ reactions!