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

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.

One Response to “BoC Cuts Overnight Rate to 0.50%; Prime Now at 2.50%”

  1. […] of Canada Prime paid on par value (100%); both of these figures may change. Prime is, in fact, now only 2.50% – while this change will affect the calculation of sustainable yield, this issue has a fixed yield […]

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