Central bank lowers interest rates to boost national economy

The Bank of Canada has lowered its trend-setting rate to 2.5 per cent.

“Slowing global economic growth continues to reduce demand and prices for energy and other commodities,“ said Canadian Real Estate Association chief economist Gregory Klump. “The Bank now expects core inflation to remain below its target of two per cent until the end of 2010, so it can further cut interest rates without worrying about causing inflation to spiral upward.”

The bank earlier lowered its policy interest rate by half a percentage point on October 8, as part of a co-ordinated cut in interest rates with other central banks. Combined with the interest rate cut on October 21, the bank has cut its overnight lending rate by three-quarters of a percentage point since September 3.

When the bank cut interest rates on October 21, the advertised conventional five-year  mortgage rate stood at 7.2 per cent — virtually unchanged from where it stood a year ago — and 0.35 per cent above where it stood when the bank made its previous interest rate announcement on September 3. 

Competition among mortgage lenders remains stiff, but discounts off advertised mortgage interest rates remain small and in some cases have been eliminated due to the U.S. sub-prime mortgage meltdown and resulting global credit crunch. These continue to elevate banks’ cost of funds.

To help the banks and ease the credit crunch, the Canadian government earlier announced a $25-billion phased-in purchase of “insured mortage pools” through Canada Mortgage and Housing Corporation at no risk to Canadian taxpayers.

Through its phased-in purchase, Ottawa is encouraging banks to issue more CMHC-insured mortgage loans to Canadian home buyers.

“We have the soundest banking system in the world,” said Canadian Finance Minister Jim Flaherty, “but we’re not an island. We get buffeted by what’s going on in other places and we’re in the midst of that now.”

The Bank of Canada’s decision to cut interest rates is to support Canadian economic growth. The bank recognized the impact that the global credit crunch is having on global economic growth, indicating, “the global economy appears to be heading into a mild recession, led by a U.S. economy already in recession.”

To stabilize credit markets in the aftermath of the U.S. sub-prime mortgage market meltdown, the bank has cut the overnight lending rate by 2.25 percentage points from December 2007 to October 2008.

The bank has reduced its forecast for Canadian economic growth.  

“The bank expects growth to be sluggish through the first quarter of next year,” according to the Bank of Canada, “then to pick up over the rest of 2009 and to accelerate to above-potential growth in 2010 supported by improving credit conditions, the lagged effects of monetary policy actions and stronger global growth. 

“The recent sizeable depreciation of the Canadian dollar will also provide an important offset to the effects of weaker global demand and lower commodity prices. Overall, the bank projects average annual growth in real GDP (Gross Domestic Product) of 0.6 per cent in both 2008 and 2009, and 3.4 per cent in 2010.”

The Bank of Canada had earlier revised its forecast for economic growth downward in its July Monetary Policy Report. Remarks in its October announcement to cut interest rates, suggest that it will likely cut interest rates further when it meets to set its policy interest rate on December 9.

“National resale housing sales activity continues to ease from its peak last year,” said Klump. “Buyers are taking more time to shop. Unlike the U.S., Canadian homeowners are by and large under no pressure to sell, so many unsold listings are being taken off the market. 

“New listings are coming off their peak, which is stabilizing the Canadian resale housing market,” he added.

According to the WinnipegREALTORS® Association — which had its best September for existing home and dollar volume sales in its history — active year-to-date MLS® listings had increased by 44 per cent over the same period in 2007. Close to 1,800 new listings were entered in September alone, which was a 22 per cent increase over the same month last year.

“The increase in listings is providing relief to home buyers, who now have more choice,” said WinnipegREALTORS® president Darlene Clare.