Mortgage Logic

Canada is entering a recession, decides Bank of Canada

The Canadian economy is going down hard and so are interest rates, and to what are their lowest levels in half a century, and for one key rate for consumers and businesses, the lowest level ever.

The Bank of Canada, finally conceding that the Canadian economy is "entering a recession" slashed its trend-setting rate by a surprisingly steep three-quarters of a point to 1.5 per cent, leaving the cost of overnight loans to the banking system at their lowest level in 50 years.

The cut, which was a quarter point more than expected, was also the steepest since the three-quarter-point cut that followed the terrorist attacks on the U.S. in 2001.

And it triggered a smaller, but still significant, half-point cut in the commercial banks' prime rates to what is an all-time low of 3.5% for the bluechip borrowing rate to which floating rate consumer and business loans, including mortgages, are tied.

But new poll results suggest consumers themselves may be reluctant to borrow more money regardless on how low rates go.

"Canadians are generally pessimistic about the economy and the outlook for the next six months," pollster Nik Nanos said in releasing results of a November survey.

The proportion who say they are worse off financially this year than last has increased to 32% this quarter from 28% in the previous quarter and is double the 16% from a year ago.

The survey also found that 80% of Canadians oppose paying higher taxes for corporate bailouts, 70% oppose paying higher taxes to avoid a deficit, and 57% oppose paying higher taxes to help pension funds.

The impact of the rate cuts on the mood of investors was offset by another retreat in prices for most commodities, including oil which fell $1.64 US to $42.07 US a barrel, and the grim Bank of Canada's warning.

"The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated," the central bank said.

"Global financial markets remain severely strained. While Canada's economy evolved largely as expected during the summer and early autumn, it is now entering a recession as a result of the weakness in global economic activity," it added.

But the central bank hasn't finished cutting rates, the analyst predicted.

"Unless there is an amazing turn around in sentiment and the economy in the weeks ahead, look for another potential (half-point) of easing by the bank early in 2009, ultimately taking the overnight rate down to 1%," projected BMO Capital Markets economist Douglas Porter.

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