The Bank of Canada has implemented an eight reduction of its overnight money rate target to 1.0%. Previous reductions from a peak of 4.5% amounted to 150 basis points between December 2007 and April 2008 and another 150 basis points during the fourth quarter of 2008. The spike in oil prices, C-dollar depreciation, and higher inflation caused the central bank to suspend its easing for six months until early October, when it participated on the 8th of that month in a round of joint cuts with the Fed and several other central banks. The 6-month hiatus now appears ill-advised, and officials are playing catch-up.
The latest thinking of Bank of Canada officials will be updated in a report to be released on Thursday, but a statement released today foreshadows several substantial forecast changes. Real GDP in 2009, which in October had been projected to expand 0.6%, is now forecast to drop 1.2%, while the estimate for 2010 growth was revised up to an optimistic 3.8% from 3.4%. Core CPI, which before was thought likely to hover below 2% until end-2010, is now seen plumbing to 1.1% in 4Q09. Excess capacity will widen this year and not be eliminated until sometime in the first half of 2011 instead of by the start of that year as assumed previously. Total CPI inflation will turn negative for two of this year's quarters. Previously, such was expected to bottom below 1% but remain above zero.
Today's statement asserts that the global economic outlook is worse than such looked at the time when policymakers last met in December, and some hopeful remarks included after that earlier meeting were not repeated today. Officials in December had predicted that cumulative rate cuts would provide timely and significant support to the Canadian economy and had asserted that C-dollar depreciation will continue to provide an important offset to the effects of weaker global demand and lower commodity prices. The one note of optimism in today's new remarks was an observation that there are singns that these extraordinary measures are starting to gain traction, although it will take some time for financial conditions to normalize.
The statement flatly says that Canada, along with many other economies, is now in recession. Thirty minutes prior to the central bank's rate cut announcement, the government released the results of its monthly manufacturing survey, confirming that the recession intensified sharply in November, with manufacturing sales and orders declining by 6.4% and 12.9%, and the ratio of inventories to sales jumping to 1.41 from 1.33 in October and 1.25 in July. By an amazing coincidence, in the four months to November, total manufacturing sales, sale excluding the automotive sector, total orders, and orders minus thus in the automotive sector each plunged 10.3% from October levels. Manufacturing shipments hit a 47-month low.
Today's statement from the central bank left open the door for a further cut in its rates and other monetary policy measures to stimulate growth and ensure that medium-term inflation does not remain below the 2% target. The next scheduled rate announcement will be at 14:00 GMT on March 3rd.