Bank of Canada Cuts Overnight Rate

(Tuesday April 22, 2008) - The Bank of Canada cut the overnight rate by 50 basis points this morning, bringing the target rate to 3.00%. The overnight rate is the rate at which major participants in the money markets borrow and lend one-day funds to each other. This is the second 50 bps rate cut in a row, and marks the first time since the 2001 US recession that the Bank has cut rates by a full percentage point in just six weeks time.

In their communiqué, the Bank notes that “buoyant growth in domestic demand…has been substantially offset by the fall in net exports.” Due to a “deeper and more protracted slowdown in the U.S. economy,” this drag from trade is expected to remain. And, in spite of financial conditions exacerbating these problems somewhat, the low level of unemployment and aggressive easing from the Bank to date highlights why many Canadians have remained fairly sheltered from the U.S. and financial-centred woes.

The Bank now forecasts the Canadian economy will expand by 1.4% in 2008 (down from 1.8%) and 2.4% in 2009 (down from 2.8%). They also see inflation – now running below 1.5% by both the core and headline measures – not returning to its 2% target until 2010.

Richard Kelly, senior economist with TD Bank Financial Group, expects the Bank of Canada's Monetary Policy Report to project dramatically lower expectations for U.S. and global growth compared to their January forecasts. Last week the Bank released their Business Outlook Survey for Spring 2008, which confirmed the availability of credit remains as bad as it was last summer. The Bank hopes to ease these pressures through its continued aggressive rate cuts and injections of liquidity into the financial markets, however imbalances in the financial sectors will continue to impair short-term borrowing.

It's likely the Bank of Canada will call for another 50 basis point rate cut at their next meeting on June 10th.

Jim Sparrow sells Calgary Real Estate with Keller Williams Platinum Realty & specializes in South Calgary estate and luxury homes. Visit our website at Calgary Luxury Real Estate or contact me directly at 403.703.2404

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