The Bank of Canada lowered its target for the overnight rate by 0.25% today to 0.25%, which they believe to be the effective lower bound for that rate – meaning there is no where else to go as it can’t go any lower.
The central bank cited the fact that there is still uncertainty in the global economy and that the international recession has gotten worse since the January policy update. Credit conditions have worsened and the steps to stimulate the financial system are taking longer than expected to have any effect. As a result, the Canadian recession will be deeper than first expected (-3% forecasted growth in ’09) with recovery in 2010 at 2.5% growth and a further 4.7% growth in 2011. This implies a more rounded “u-shaped” recovery rather than a sharp “v-shaped” recovery with growth bouncing back very quickly after a recession.
The statement released this morning also included very unusual, long-term guidance as the target for the overnight rate hits it’s lower limit, they said:
“it is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities. Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.”
So, the long-term outlook for interest rates will be very low, if inflation stays in check, until at least April 2010! This additional guidance helps to provide additional stability as it takes the guesswork out of when rates will increase from historic lows, and is great news for home buyers and mortgage shoppers. We’ll see if the banks follow suit.
Today’s decision means that the Bank of Canada has lowered interest rates by 4.25% since December 2007.