Bank of Canada delivers bold 75-basis-point cut
--------------------------------------------------------------------------------
Advertisement
--------------------------------------------------------------------------------
By TERRY WEBER
09:33 EDT Tuesday, October 23, 2001
A sharply weaker economy this summer and the subsequent impact of last month's devastating terrorist attacks in the United States prompted the Bank of Canada to slash interest rates by a surprise three-quarters of a percentage point Tuesday.
As a result of the 75-basis-point reduction, the bank's target for the overnight rate is now 2.75 per cent. That's the lowest level since the early 1960s.
Tuesday's move was the boldest so far this year, which has seen the central bank consistently easing interest rates in an effort to stimulate the flagging economy.
Including the most recent cut, the bank's benchmark rate has been lowered by a total of 300 basis points since January. A basis point is 1/100th of a percentage point.
In the U.S., the Federal Reserve has cut rates by 400 basis points since the start of the year.
Almost immediately after the announcement, Canada's major banks began to mirror the rate cut. Just minutes after the decision was made public, Royal Bank lowered its prime lending rate by 75 basis points to 4.5 per cent effective Wednesday.
"Over the course of the summer, a more pronounced weakening trend in economic activity became evident in Canada and globally," the Bank of Canada said in Tuesday's monetary policy announcement.
"The terrorist attacks of 11 September appear to have exacerbated this trend."
As a result, the bank warned, levels of economic activity through the second half of this year and the first half of next will be "further below the economy's potential output than previously expected."
"This will result in persistent downward pressure on inflation through much of next year," the central bank said. "Core inflation, which was 2.3 per cent in September, is now expected to move down below 2 per cent in early 2002."
"Total CPI inflation, which was 2.6 per cent in September, should also decline below 2 per cent by early 2002, if energy prices remain at or below their early-September levels."
Tuesday's announcement — which surprised a market widely expecting a milder 50-basis-point cut — marks the second time since the last month's tragic attacks in New York, Washington and Pennsylvania that the Bank of Canada has cut rates in an effort to stimulate the flagging Canadian economy.
On Sept. 17, the central bank — acting in concert with its counterparts in the United States and Europe — also cut by a half point.
Forecasts for both the Canadian and world economies have been increasingly gloomy following last month's events in the United States. In late September, Bank of Canada governor David Dodge warned — for the first time since the economy began to slow — that Canada could slip into a recession.
"Our best estimate is that we are close to zero [economic growth] for the second half of the year. If I have to put a probability on that, it is probably close to zero on the negative side — but it really is close to zero," Mr. Dodge told reporters, also saying that a mild recession is "certainly possible."
On Sept. 11, terrorists hijacked four commercial airliners in the United States. Two were crashed into the twin towers of the World Trade Center in New York, a third slammed into the Pentagon in Washington and the fourth was brought down outside Pittsburgh.
Thousands were killed in the attacks, which has prompted military action in Afghanistan and left the world teetering on the brink of a recession.
In Tuesday's statement, the central bank also suggested continued concern over the impact of global uncertainty in the shadow of current events.
"In this environment of exceptional uncertainties about geopolitical developments and business and household confidence, the Bank will continue to monitor economic developments very closely," the central bank said.
Even before the attacks, the economy was showing signs of weakening. Before Tuesday's announcement, the Bank of Canada had already cut its interest rate seven times in an bid to boost the economy. Since the attacks, most forecasters have put off their forecasts for recovery.
The Bank of Canada's next scheduled policy announcement is set for Nov. 27.
Copyright © 2001 The Globe and Mail |
