Better Late Than Never

The Bank of Canada got it right this morning in cutting the key interest rate by 0.75%. This bold action makes up for the timidity of cutting by only 0.25% last time. The central bank should be applauded for (finally) recognizing the severity of the economic crisis and going further than recommended by the C. D. Howe Institute’s conservative Monetary Policy Council.

Although the Bank’s statement makes the obligatory references to “core inflation” and “the 2 per cent inflation target”, it refreshingly (if implicitly) acknowledges that the goal of monetary policy is now to provide economic stimulus rather than to manage inflation.

Of course, there are serious doubts about how much stimulus a lower interest rate will deliver in an environment where financial institutions are afraid to lend while businesses and households are reluctant to borrow.

Fiscal policy could and should directly spur economic activity. However, since the Government of Canada introduced an Economic Statement with no new spending and then prorogued Parliament, there is no immediate possibility of fiscal stimulus. This makes it imperative for the Bank of Canada to do whatever it can through monetary stimulus.

Indeed, the federal government’s surprising failure to announce any fiscal stimulus may partly explain the central bank’s newly aggressive posture on monetary policy. Although the Bank of Canada would never overtly criticize the Government of Canada, today’s statement intriguingly refers to “fiscal policy actions” in an international context but not in a Canadian context.

The statement appropriately leaves open the possibility of “further monetary stimulus.” With the US Federal Reserve’s key rate at only 1%, there clearly is room for the Bank of Canada to cut its rate below 1.5%.

UPDATE (Dec. 11): Toronto Star, Bloomberg and LesAffaires coverage

6 comments

  • Now that we are at such a low rate, and given that there has been little pass-through of these short-term rates (my mortgage excluded — hooray!), the Bank should now start buying up long-term government debt through open-market operations to reduce those rates.

  • Does that mean that with a US rate at 1%, we still have another 0.5% to fall before we’re at parity with the US? Because 1% would be really nice, just to see it happen once in my life. But then they’ll all be like “Aw, grandpa, not another story about the 1% interest rate. Tell us about Obama’s puppy.”

  • How much of these rate cuts end up in the bankers back pockets rather than greasing the consumption machine, is starting to become rather problematic.

  • I put up a graph on that a couple of weeks back. The short of it is the gap between the BOC prime and the commercial banks prime has been growing. That plus the hanky panky with the DOF means the Banks are doing exceedingly well all things considered. But then again we do not expect to find kings starving during a famine now do we?

    http://rppe.wordpress.com/2008/11/25/gap-between-boc-prime-and-prime-mortgage-rate-increasing/

  • Good work Travis, amazing isn’t it. What would you bet me that if we had a coalition government in power right now, a whole lot more of that rate cut would have been passed off to consumers.

    The banks have Harper in their pocket and they know it, with all the credit market BS, they can easily use that as a screen for keeping the differentials, plus have a nice cushion to count their profits on. I wonder what kind of a slap on the wrists it would take to get them to pass it on. We have tried transferring billions and all the other measures you mention. Maybe some oversight infrastructure is needed. You we are going to see that from Harper? Guess again, I would think this would resonant well with the public, and the opposition should include that within their demands for the budget. That is, assuming Mr. Harper reaches out to the opposition.

    Can you imagine the Royal bank showing a profit of over a Billion dollars last quarter, yet Flaherty is still priming the safety net pump.

    This is out and out one of the bigger contradictions in Canada, I have witnessed during these crisis laden times.

    Paul

  • Seems as though we have a bit of a consumer revolt against the banks. Will they listen. See this article.

    http://www.thestar.com/business/article/551917

    Our man Jimbo, keeper of the faith, had some good comments in this one, short but to the point.

    However Finance Minister Flaherty’s comments are quite a gas for those looking for a good laugh.

    Quoted from the article- In a statement, Flaherty’s spokesperson said Canada has “an open, competitive banking system”.

    enough said

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