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Bank of Canada cuts interest rates again

The Bank of Canada lowered its benchmark overnight lending rate by three quarters of a percentage point to 1.5 per cent at its setting on December 9th. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, declined to 1.75 per cent. The Bank declared that Canada was joining a global economic recession, which it said: “will be broader and deeper than previously expected.“ The global credit crunch is dragging down global economic growth, and the Bank expects “it will take some time before conditions in financial markets normalize.” The Bank is much more downbeat now than it was in October 2008, when it last decided to lower interest rates. Its October announcement said: ”the global economy appears to be heading into a mild recession, led by a U.S. economy already in recession.” The Bank has repeatedly lowered its policy interest rate to support economic growth throughout the year, including October’s half percentage point cut as part of coordinated interest rate cuts with other central banks. Since December 2007, the Bank has cut its overnight lending rate by a total of three per cent. “Canada is in better shape to weather the global economic recession than many other countries,” said CREA Chief Economist Gregory Klump. “Lower interest rates and a lower Canadian dollar will support economic growth, as will expected government spending.” The Bank acknowledged that households have become cautious, and that the global and domestic economic recession and credit crunch “imply a lower profile for core inflation than had been projected at the time of the last Monetary Policy Report in October.” The Bank targets the core rate of inflation at two per cent. The rate has stayed below the target level since October 2007. Telegraphing the potential for additional cuts when it next meets in January to set its policy interest rates, the Bank also said it “will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the two per cent inflation target over the medium term.” When the Bank cut interest rates on December 9th, the advertised five-year conventional mortgage rate stood at 6.95 per cent. This is down 0.44 per cent from one year earlier, and a quarter of a percentage point below where it stood when the Bank made its previous interest rate announcement on October 21st. The ongoing credit crunch has led mortgage lenders to reduce discounts on advertised mortgage interest rates, and in some cases these have been completely eliminated. “Sales activity remains on a downward trajectory, with buyers taking more time to shop,” said Klump. “Unsold listings are being, and will continue to be, taken off the market, which will limit price declines.” [CREA 09/12/2008]

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