The Bank of Canada lowered its overnight cash rate for the fourth consecutive policy meeting, bringing the benchmark to 1.00 percent - its lowest level since the central bank was established back in 1934. However, the historical low is not the most significant outcome of this event. Rather, the possibility that the main rate in Canada reaches zero through fading projections for inflation and growth trend as well as noteworthy commentary has taken speculation beyond today's largely discounted cut.
A Historic Cut
The 50 basis point cut in the benchmark lending rate today matched the consensus presented by economists and was largely discounted by market participants through the Canadian dollar and overnight swap rates. Looking at the fundamentals that supported this decision, it comes as little surprise that the central bank would pursue the expansionary policy they began at the end of 2007. Growth through the open of 2008 cooled 0.8 percent on an annualized basis - the sharpest contraction in 17 years. And, though readings in the subsequent quarters improved, key underlying indicators (such as retail sales, PMI business activity and employment) has steadily pulled the outlook for expansion down. Growth alone would not have allowed Governor Mark Carney and his fellow central bank members to have taken such an aggressive pace of rate cuts. With the global financial crisis seeping into the Canadian markets and inflation pulling back to target (2.0 percent), officials have taken the initiative to take a preventative stance towards policy to prevent a severe recession the likes of which the United States and United Kingdom are heading towards.
Projections Taking Canada Closer To ZIRP
Up until recently, the Bank of Canada's dovish monetary policy has been precautionary as growth and inflation would have supported a neutral or even mildly hawkish stance. While policy officials have given some clue of their intentions, each rate decision would still come with sense of surprise from market participants. However, we can see that this sentiment has certainly shifted with even cautious economists fully pricing in a 50 basis point rate cut to record lows. From here, we would naturally have to expect that the BoC will be limited in its capabilities and approach as a benchmark at 1.00 percent doesn't allow for much more easing in the traditional sense. Nonetheless, we can see that traders will be pricing in additional cuts and perhaps even a zero interest rate policy (ZIRP) before the global economy and rates turn.
Canadian officials cleared the path for ongoing rate cuts - that may eventually bring their own benchmark to levels that match the US and Japan - through dour forecasts for economic trends and key commentary. Forecasting the outcome of the next scheduled rate decision on March 3rd, traders will fall back to the BoC's suggestion that further monetary stimulus may be needed after today's reduction. However, with only 100 basis points to work with, this does not substantiate more than a quarter percent rate cut; and if the Canadian benchmark is to meet it's US counterpart before the global economy bottoms and rates stall, consistency will be essential. Projecting beyond the next rate decision, the market will defer to projections for economic activity. For inflation, the BoC's statement suggested annualized CPI would drop below zero for two quarters through 2009, while the core gauge would bottom at 1.1 percent through the fourth quarter of this year. While price pressures allow for policy action, growth forecasts will prompt them. Alluding to heightened uncertainty in the economy and market, policy officials have set the benchmark for growth through 2009 at a 1.2 percent contraction. And, while the following year is expected to see a 3.8 percent rebound, such an estimate is based on the a recovery in the financial markets as a precondition.