Overnight Bank Rate Dropped to 0.5%

The Bank of Canada has just announced it has dropped its target for the overnight rate by 50 basis points to 0.5%. You may recall back in December that we started on this descent into unprecedented lows known as the “race to zero”. The goal is to help the Canadian economy recover from the current recession. According to Bank of Canada’s news release:

The effects of the recent aggressive monetary and fiscal policy actions in Canada and other major economies will begin to be felt in the second half of this year and will build through 2010. Once the global financial system stabilizes and global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialized economies.

According to CBC Newsworld (TV) some of the major Canadian banks are now following suit by dropping their lending rates.

How much lower can we go? The Bank of Canada is now making plans for what to do once we do reach zero bank rate:

Given the low level of the target for the overnight rate, the Bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing. In its April Monetary Policy Report, the Bank will outline a framework for the possible use of such measures.

You may recall we mentioned this tactic of quantitative easing on Slaw back in
December. 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.

The Bank of Canada is next scheduled to set new targets for the overnight rate on April 21, 2009.