Rate cut heralds ‘deeper’ financial downturn

April 27, 2008

prime.jpgA report from The Globe & Mail on April 23, 2008:

Canadian banks cut interest rates dramatically yesterday after the Bank of Canada slashed its main rate by half a percentage point and warned that a serious economic slowdown was only just beginning.

All major banks cut their prime lending rate by 50 basis points, amid a central bank warning that Canada faces a tough two years. Marking the most serious cuts since the post-9/11 downturn, the bank has now cut rates twice in six weeks. The loonie closed at 99.21 cents U.S., down 0.19 cents.

The central bank’s new forecast puts real growth at just 1.4 per cent this year and 2.4 per cent in 2009. Despite the aggressive central bank action, the biggest commercial banks were slow to react, and there was little sign late yesterday of serious interest-rate cuts at the consumer level.

Several hours of foot-dragging by the chartered banks raised concerns about the central bank’s effectiveness and whether the commercial banks are more concerned about growing credit risks.

TD announced a 50-basis-point cut to its prime lending rate, to 4.75 per cent. The other four big Canadian banks followed suit.

Tightening credit conditions and crumbling confidence also mean that business investment and consumer spending will weaken in Canada, the bank warned.

The bank’s next announcement for the target rate is scheduled for June 10.

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South of the border, declining home prices pose another major financial crisis to the US mortgage lenders, as homeowners “walking away will post the next crisis“.

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