PrefBlog

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!

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 …

• CIBC to 4.35%
• BMO to 4.25%
• Royal to 4.25%
• TD to 4.35%
• Scotia to 4.25%

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.