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BoC Increases O/N Rate 25bp to 1.00%; Prime Follows

Wednesday, September 8th, 2010

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:

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BoC Hikes Overnight Rate by 25bp to 0.75%, Prime Follows

Tuesday, July 20th, 2010

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:

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BoC Raises O/N Rate 25bp to 0.50%; Prime Follows

Tuesday, June 1st, 2010

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.
…
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

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Bank of Canada Halves Overnight Rate to 0.25%; Prime Follows to 2.25%

Tuesday, April 21st, 2009

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.
…
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:

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BoC Cuts Overnight Rate to 0.50%; Prime Now at 2.50%

Tuesday, March 3rd, 2009

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.
…
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:

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.

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Bank Rate cut 50bp to 1.00%; Fully Transmitted to Prime

Tuesday, January 20th, 2009

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:

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!

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Bank Rate Cut 75bp; Prime 50bp. Canada Prime Now 3.50%

Tuesday, December 9th, 2008

The Bank of Canada cut by 75bp today:

The Bank of Canada today announced that it is lowering its target for the overnight rate by three-quarters of a percentage point to 1 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 1 3/4 per cent.

The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated. Global financial markets remain severely strained. Measures taken by major governments are beginning to encourage credit flows, although it will take some time before conditions in financial markets normalize. In addition, a series of recently announced monetary and fiscal policy actions will also support global economic growth.

While Canada’s economy evolved largely as expected during the summer and early autumn, it is now entering a recession as a result of the weakness in global economic activity. The recent declines in terms of trade, real income growth, and confidence are prompting more cautious behaviour by households and businesses.

All of these factors imply a lower profile for core inflation than had been projected at the time of the last Monetary Policy Report in October.

Several factors are helping to counterbalance the negative drag from the global economic and financial developments. The depreciation of the Canadian dollar will continue to provide an important offset to the effects of weaker global demand and lower commodity prices. As well, money markets and overall credit conditions in Canada are responding to significant and ongoing efforts to provide liquidity to the Canadian financial system.

In light of the weakening outlook for growth and inflation, the Bank of Canada lowered its policy interest rate by a total of 75 basis points in October and by an additional 75 basis points today. These monetary policy actions provide timely and significant support to the Canadian economy.

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 inflation target over the medium term.

The banks did not fully participate:

  • TD, down 50bp, now 3.50%
  • CIBC, down 50bp, now 3.50%
  • Scotia, down 50bp, now 3.50%
  • Royal, down 50bp, now 3.50
  • BMO, down 50bp, now 3.50%

At the penultimate cut, TD threw down the gauntlet by not maintaining the spread; this resulted in a $25-billion liquidity injection, later increased to $75-billion which maintained the historical relationship.

The most recent cut in the overnight rate maintained the spread.

Given that What-Debt? has run away from Parliament, it will be most interesting to see if there is any political reaction to this turn of events. Quick! Call Duceppe so Spend-Every-Penny will know what to oppose!

Posted in Banking Crisis 2008, Canada Prime | 1 Comment »

Bank Rate cut; Prime Follows

Tuesday, October 21st, 2008

The Bank of Canada announced today:

that it is lowering its target for the overnight rate by one-quarter of a percentage point to 2 1/4 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 2 1/2 per cent.

… and as a result:

Assuming that BMO & RY have simply misplaced their quill pens temporarily, this will be a smooth transmission of the Bank Rate cut – unlike last time. The Bank of Canada also announced today that $4-billion in 3-month money was auctioned off at 2.778% average yield, range of 2.55% to 3.00%.

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Prime Reduced With Government Subsidy

Friday, October 10th, 2008

TD threw down the gauntlet and Flaherty’s picked it up.

The Ministry of Finance announced today that:

the Government will take steps to maintain the availability of longer-term credit in Canada by purchasing up to $25 billion in insured mortgage pools through the Canada Mortgage and Housing Corporation (CMHC). This action will help Canadian financial institutions raise longer-term funds and make them available to consumers, homebuyers and businesses in Canada.

This relief to Canadian homebuyers and consumers comes at no fiscal cost to the taxpayer. Indeed, these securities will earn a rate of return for the Government that is well above the Government’s own cost of borrowing. Moreover, as insured mortgage pools in Canada already carry Government backing, there is no additional risk to the taxpayer.

This is, of course, the complete nonsense we have come to expect from government – any government, by the way, not just Harper’s. They will now have to go out and borrow $25-billion, which will – one should expect – push up the government’s cost of borrowing. We are, obviously, a long way from being in as bad a position as Iceland (or as bad as Canada, 1994), but this is the first step down that road.

There is no additional credit risk, to be sure, but that isn’t the only risk that applies to fixed income investment. Will they do the financing with matching term? Will they mark the positions to market?

I’m not saying this is a bad thing, mind, but I am saying that a little less public relations and a little more honest discussion of the issues would be greatly appreciated.

Also, this represents an easing of monetary conditions … remember the last currency debacle?

, the currency decline has more recently developed a momentum that, together with the upper pressure on medium- and longer-term interest rates, signals a diminishing of confidence in Canadian dollar investments. At the same time, the depreciation of the currency has resulted in a substantial easing of monetary conditions.

The Monetary Conditions Index is no longer fashionable, but the Bank acknowledges:

Together, interest rates and the exchange rate determine the monetary conditions in which the Canadian economy operates. Changes in the exchange rate affect spending and demand in the economy just as changes to interest rates can either increase or decrease the level of economic activity.

It will not have escaped notice by Assiduous Readers that:

Canada’s dollar weakened 14 percent since Sept. 26 as turmoil in global financial markets prompted investors to seek the relative safety of U.S. government debt.

That’s a lot of stimulus!

Anyway …

Posted in Banking Crisis 2008, Canada Prime | 4 Comments »

TD Throws Down the Gauntlet on Prime

Wednesday, October 8th, 2008

TD Bank has announced:

it has lowered its prime lending rate by 25 basis points to 4.50 per cent, effective October 9, 2008.
“Like all financial institutions, we have been watching the key lending rates very closely. Continuing market turmoil has steadily driven up the cost of borrowing for financial institutions. This makes it challenging to match the Bank of Canada rate cut at this time. We recognize the efforts the Bank of Canada is making and, despite the fact that our cost of funds remains high, we have decided to reduce our rate by 25 bps. We see this as a balanced move in managing our funds and passing along the intended benefits to our customers,” said Tim Hockey, President and CEO, TD Canada Trust.

This follows the Bank of Canada announcement:

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

Bank of Canada lowers overnight rate target by 1/2 percentage point to 2 1/2 per cent

The Bank of Canada today announced that it is lowering its target for the overnight rate by 1/2 percentage point to 2 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 2 3/4 per cent.

So Prime and the Bank of Canada rate have now decoupled … the potential for this was discussed in PrefBlog on January 16.

It will be most interesting to see what the other banks do … will they seek to maintain their margins and follow TD? Or will they go after market share and follow the Bank?

Update: Margins it is!

CIBC, Royal Bank of Canada, Scotiabank and Bank of Montreal soon followed, saying they would cut their prime by a quarter point as well to 4.5 per cent from 4.75 per cent, effective Thursday.

Posted in Banking Crisis 2008, Canada Prime | 3 Comments »

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