The bank of Canada took the last step before making money absolutely free yesterday by lowering it’s key overnight interest rate to 0.25%. For someone who remembers 15% interest rates, this is an astounding turn of events, that I have no idea how long will last or whether it is a good or a bad thing.
Deteriorating credit conditions have spread quickly through trade, financial, and confidence channels. While more aggressive monetary and fiscal policy actions are underway across the G20, measures to stabilize the global financial system have taken longer than expected to enact. As a result, the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009.
Yup, they are now saying that Canada’s anticipated early recovery is now only planned to happen in Q4 of this year, if not later, so keep that one in mind when making your big financial plans.
What About Inflation?
Well the bank’s view on that one is interesting as well.
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.
So effectively DEflation for a quarter, but lower inflation for the next two years.
How can this be, all governments in the world have hurled massive cash inflows and food prices are at a highly inflationary rate, yet there is no real inflation seen on the event horizon. I am skeptical of this statement by Canada’s Central bankers.
How Did We Get Here?
The bank was kind enough to publish this table showing how we have gone from 3.00% a year ago to 0.25 % today.
|Date||Target (%)||Change (%)|
|21 April 2009||0.25||– 0.25|
|3 March 2009||0.50||– 0.50|
|20 January 2009||1.00||– 0.50|
|9 December 2008||1.50||– 0.75|
|21 October 2008||2.25||– 0.25|
|8 October 2008||2.50||– 0.50|
|15 July 2008||3.00||—|
|10 June 2008||3.00||—|
|22 April 2008||3.00||– 0.50|
Better get out my Dire Straits album, because if Money is For Nothing, I am going to be looking for the second part of that line.
Not sure if I want my MTV, but Money For Nothing sounds interesting to me.
Will Banks Follow?
That is a darn good question, will banks lower their rates to consumers to reflect this change, or will it be business as usual? This drop may well be a temporary thing, so there may be no reaction by BMO, TD, Scotiabank or the other major Canadian banks.