The Race to Zero: Bank Rate at 50 Year Low

This morning the Bank of Canada announced the reduction of its overnight rate by .75, lower than even predicted by economists. The overnight rate now stands at 1.5 %, a level not seen since 1958. And with it, acknowledgement that Canada is “now entering a recession.”


According to the Bank of Canada press release (Dec. 9/08):

The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated. Global financial markets remain severely strained. Measures taken by major governments are beginning to encourage credit flows, although it will take some time before conditions in financial markets normalize. In addition, a series of recently announced monetary and fiscal policy actions will also support global economic growth.

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. The recent declines in terms of trade, real income growth, and confidence are prompting more cautious behaviour by households and businesses. [emphasis added]

It goes on to say:

The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent inflation target over the medium term.

The Globe and Mail (Dec. 9/08) gives a little more discussion, indicating that so far only one major Canadian bank has dropped its rate, and not the full .75. The major banks have been cautious so far, largely not reducing their interest rates.

The discussions from Bloomberg.com and CBC TV imply that this stimulus was necessary as it was not forthcoming from the government, especially now that Parliament is prorogued.

In the “race to zero,” what happens when the bank rate gets to zero? According to an article from Seeking Alpha (Nov. 26/08):

When a central bank runs out of room to cut interest rates, it resorts to Quantitative Easing. This term was coined by the Bank of Japan in 2001 when interest rates were already at zero and the central bank stopped targeting the overnight call rate and turned to targeting a current account level. Their goal was to flood the Japanese financial system with liquidity by buying trillions of yen of financial securities including asset-backed instruments and equities.

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Comments

  1. Jeong Chun phuoc

    “Islamic Financial System as an antidote for the Global Financial Instability of 2008/9″
    15.5.2009
    by Jeong Chun Phuoc

    The current positioning towards zero or near-zero interest rate is nothing something new. It is not even since 1951 or 2001 (a precedent set by Japan). A race for zero percent interest rates is also not indicative that a recesssion is imminent in any country because it has got nothing to do with a substantive recession.

    A zero percent rate could in fact lead to economic prosperity if the variables are set right. Take a look at current Islamic banking activities around the world. Are conventional banks taking a leaf from Islamic banking history without due cognisance of its effectiveness as an alternative to current world economic illness ?

    To set the record right, since 1400 year ago, during the time of the Arabic Jahilliyah period, Islam calls for a total ban or prohibition of interest rates i.e usury or in Arabic ‘riba’ which could lead to social chaos and economic instability. Even Smith and Maslow and other well-known economists had never figure it out why Islamic banking system was not in the whole macro-micro-economics equation. Ibn Khaldun and earlyIslamic economists set the pace that only 21st century economists subsequently understood why.

    Several decades ago, the Islamic financial system(‘IBS’) of ‘no- interest’ or no ‘riba’ was frowned upon as an archaic system, obsolete in the eyes of conventional banking standards etc. Today, many internatonal financial houses are giving Islamic banking system ‘AAA’ ratings.

    It is therefore crucial to adopt Islamic banking system (‘IBS’) as an alternative, if not a supplement, to the current flawed financial systems, as IBS may lead the world out of the present economic doom.

    ……………
    Jeong Chun phuoc
    Lecturer-in-Law
    Jeongphu@yahoo.com

  2. This has been discussed elsewhere as well, including the Washington Times.

    Although growth is more tempered in these alternative systems, they do tend to be more stable in the long-term. And for societies more interested in maintaining historic stability instead of new wealth creation, it can be a viable alternative.

  3. Jeong chun phuoc

    With reference to Omar Ha Redeye’s view, my article has no similarity with the article raised in the Washington times.

    Jeong chun phuoc