Legal Research

The Race to Zero: Bank Rate at 50 Year Low

By Connie Crosby

This morning the Bank of Canada announced the reduction of its overnight rate by .75, lower than even predicted by economists. The overnight rate now stands at 1.5 %, a level not seen since 1958. And with it, acknowledgement that Canada is “now entering a recession.”

According to the Bank of Canada press release (Dec. 9/08):

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. [emphasis added]

It goes on to say:

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 Globe and Mail (Dec. 9/08) gives a little more discussion, indicating that so far only one major Canadian bank has dropped its rate, and not the full .75. The major banks have been cautious so far, largely not reducing their interest rates.

The discussions from Bloomberg.com and CBC TV imply that this stimulus was necessary as it was not forthcoming from the government, especially now that Parliament is prorogued.

In the “race to zero,” what happens when the bank rate gets to zero? According to an article from Seeking Alpha (Nov. 26/08):

When a central bank runs out of room to cut interest rates, it resorts to Quantitative Easing. This term was coined by the Bank of Japan in 2001 when interest rates were already at zero and the central bank stopped targeting the overnight call rate and turned to targeting a current account level. Their goal was to flood the Japanese financial system with liquidity by buying trillions of yen of financial securities including asset-backed instruments and equities.

Full post as published by Slaw.ca on December 09, 2008 (boomark / email).