Bank of Canada cuts rate to virtual zero, says extraordinary action possible
March 03, 2009
OTTAWA - The Bank of Canada slashed its key short-term interest rate about as low as it can go Tuesday and said it may have to resort to extraordinary measures to stimulate the economy which, it acknowledged for the first time, is unlikely to recover this year.
The central bank did what most private-sector economists advised it to do, cut the trend-setting overnight rate to an all-time low of 0.5 per cent and Canada's commercial banks quickly followed, cutting their prime rate by half a percentage point.
The lower prime rate, which falls to 2.50 per cent on Wednesday, will benefit some mortgage holders but will have little or no immediate impact on many corporate borrowers or credit card holders and will further reduce some interest rates paid to savers.
Canada's major banks appeared ready to play ball with Carney: shortly after the announcement, Royal Bank (TSX:RY), Bank of Montreal (TSX:BMO), TD Bank (TSX:TD), CIBC (TSX:CM) and Scotiabank (TSX:BNS) announced that they would cut their prime rates by half a percentage point, in step with the central bank.
But while variable mortgage rates tied to prime are being reduced, longer-term and fixed rates have not kept pace with the central bank's moves, partly because chartered banks are reluctant to lend into a recession for fear of failures and partly because their own borrowing costs are higher than would be expected.
Still, Jim Rawson, a regional manager Toronto-based mortgage firm Invis, says the most recent cut in combination with measures in the government's January budget will increase borrowing.
"A lot of people will be interested in re-financing mortgages and it will spur a lot of first-time buyers," Rawson predicted.
The federal budget, yet to make its way through Parliament, offers $750 in tax relief for first-time home buyers while increasing the limit that can be withdrawn from RRSPs for a down payment by $5,000.