Bank of Canada cuts rate by 50bps

Canada: Bank of Canada Cuts by 50bps as Expected
 
· The Bank of Canada cut rates by 50 bps as widely expected. This leaves the overnight rate at 0.5%, which is a historical low.
 
· The statement contained some interesting information. It suggested that the Bank could conceivably take the overnight rate lower, and quantitative easing is now on  the table as an option.
 
· The April Monetary Policy Report will now be the next focus, as it will be when the Bank releases its framework for possibly using quantitative easing.
 
The Bank of Canada cut the overnight rate by 50 bps today, which puts the overnight rate at a historical low of 0.50%. Since beginning the easing cycle in December 2007, the Bank has now cut 400 bps from the overnight rate.
 
The statement was of great importance this time around. The Bank admitted that economic conditions have deteriorated since the January MPRU, and yesterday's fourth quarter GDP report confirmed that Canada's economy is in rough shape. Against this backdrop, there is scope for not only the overnight rate to conceivably head lower, but the Bank also acknowledged that the use of quantitative easing is a possibility.
 
In the admission that there could be some delay in closing the output gap, the Bank noted that the collapse in confidence and the impact of the slumping wealth effects are the primary culprits. But the Bank of Canada expects that the impact of the monetary stimulus already in the pipeline will start to be felt in the second half of the year. Once the stimulus gets some traction, the underlying strength of Canada's fundamentals will "ensure a more rapid recovery in Canada than in most other industrialized nations."
 
There was a lot of speculation as to whether the Bank would even mention the idea of quantitative easing, and indeed, they did. The statement noted that it would use it if required and in its Monetary Policy due on April 23, "the Bank will outline a framework for the possible use of such measures."
 
The Bank kept the statement that "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." This suggests they have left the door open for possibly adding more stimulus via lower rates or alternative policy measures. But what caught our eye is the statement that "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." In conjunction with presenting a plan to possibly use quantitative easing and admitting that their forecasts in January were too optimistic suggests that conditions are indeed dire. Our base view at time of writing is that the Bank of Canada does not lower rates any further, though as the environment remains very fluid, the Bank has left itself an open door to employ further easing in some form should it become necessary, and we view this as a very serious risk.
 

**********************************************************************************

I proudly server buyers and sellers in the Toronto Neighbourhoods of: Forest Hill, Cedarvale, North York, North Toronto, Summit Heights, Wilson Height, Bathurst Manor, Leaside, Bayview, Thornhill, Richmond Hill and all surrounding areas.

Whether you're buying or selling and looking for a Toronto Realtor or feel free to e-mail or phone us and we will be happy to guide you through your real estate experience.