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The Bank of Canada cut its benchmark overnight lending rate one-half of one percentage point to three per cent on March 4th. It also signaled further cuts in the near future. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, now stands at 3.25 per cent.
The Bank now expects the U.S. economic slowdown to be longer and deeper than previously thought, resulting in a drag on Canadian exports and economic growth. The Bank also forecast weaker domestic investment and consumer spending due to tightening credit conditions and softening sentiment.
The Bank repeated earlier statements that the domestic economy will remain robust: “Domestic demand is projected to remain strong, supported by firm commodity prices, high employment levels, and the effect of cumulative easing in monetary policy.”
The Bank also marked down its inflation outlook, with inflation forecast to remain below two per cent until 2010. The continuation of low inflation will enable the Bank to continue cutting interest rates when it sets those rates again in June. “In line with this outlook, some further monetary stimulus will likely be required to achieve the inflation target over the medium term,” said the Bank.
“The credit crunch and shaky U.S. economic growth will remain a downside risk to Canadian economic growth for some time,” said CREA Chief Economist Gregory Klump. “The Bank has all but said it will continue lowering interest rates to support economic growth, now that it sees inflation staying below its target rate of two per cent for years.”
When the Bank decided to lower interest rates on April 22nd, the advertised conventional five-year conventional mortgage rate stood at 6.99 per cent. This is less than one half of a percentage point above where it stood a year ago. Competition among mortgage lenders remains stiff, but discounts off advertised mortgage interest rates have shrunk because the U.S. subprime mortgage meltdown and resulting global credit crunch have raised banks’ cost of funds.
“National sales activity will stay strong and prices will continue rising. Housing affordability and Canadian housing demand will benefit from additional interest rate cuts,” Klump added. (CREA 22/04/08)
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