Mortgage Broker Victoria BC

January 20, 2009

BANK OF CANADA LOWERS OVERNIGHT RATE TO 1.00%
TD Bank Financial Group

Recent economic data clearly show a Canadian
economy tilting into recession in the fourth quarter of last
year, a full year after the start of the U.S. recession. Against
this backdrop of continually souring economic news that is
unlikely to improve anytime soon, it came as no surprise
that the Bank of Canada (BoC) lowered its policy interest
rate yet again. The only issue worth debating prior to this
decision was with regards to the extent of easing. On that
front, the BoC’s decision to lower the overnight rate by 50
basis points (bps) was largely in line with market expectations
and those of private-sector forecasters, including TD
Economics.

In the communiqué accompanying today’s decision, the
BoC notes that since its last decision to slash the overnight
rate by 75bps on December 9th, “the outlook for the global
economy has deteriorated […], with the intensifying financial
crisis spilling over into real economic activity”. It
also cites weakened business and consumer confidence
worldwide and the resulting erosion of domestic demand.
On the plus side, there is mention that the extraordinary
policy actions from governments and central banks “are
starting to gain traction, although it will take some time for
financial conditions to normalize.” All said, the BoC expects
Canadian real GDP to contract by 1.2% this year,
which is close to our early December expectation for a
1.4% contraction. The BoC’s outlook for real GDP growth
of 3.8% in 2010 is, however, significantly ahead of our
more cautious call of 2.4% growth. The BoC’s latest forecasts
will be detailed on Thursday in its Monetary Policy
Report Update.

As for the inflation outlook, the BoC expects core inflation,
which stood at 2.4% as at November, to ease and
bottom at 1.1% in the fourth quarter. Total (all-items) inflation
is expected to dip into negative territory for the first
two quarters of this year as a result of falling energy prices.
Both measures of inflation are expected to converge back
up to the 2.0% target rate in the first half of 2011.
As the policy interest rate nears closer to an absolute
bottom of zero, the BoC is understandably eliminating explicit
references to the need for further easing, coaxing the
markets towards the end of this aggressive easing cycle –
a cumulative 350bps since December 2007. However, consistent
with their tone prior to today’s decision, the BoC is
leaving the door open to further easing. We expect a further
50bps reduction, down to a floor of 0.50%, at the next
decision, slated for March 3. Furthermore, given the considerable
amount of remaining uncertainty and the fact that
the Canadian recession has just started, the policy rate is
expected to stay at this record low well into 2010 before
inflation starts registering on the radar again

Pascal Gauthier, Economist
416-944-5730

Respectfully,
Krista and Sherri
www.lawlessbrown.com