Financial Update

· TSX +94.47pts (Reuters) Late day buying saved the day after a seesaw volatile session that saw the TSX swing nearly 580 points from trough to peak
· Dow +172.04pts closed higher as investors wrestled with fears about the economy but also hunted for bargains after 2 days of selling
· Dollar -.06c to $79.64US.
· Oil +1.09to $67.84US per barrel.
· Gold -20.50 to $714.70US per ounce

(Reuters)Finance Minister Jim Flaherty announced the creation of the Canadian Lenders Assurance Facility, guaranteeing wholesale borrowing by the country's banks.

Flaherty said the temporary program will support the banks "on commercial terms so there is no expected cost to Canadian taxpayers," while stressing that Canada's lending institutions are solid and "the Canadian housing market is sound."

'The sky is not falling,' says BOC governor

Declines in housing market and commodities more rapid than expected

Jacqueline Thorpe, Financial Post

The Bank of Canada continues to believe Canada can avoid a recession this year and next, despite the protracted three-quarter recession it forecasts for the U.S. economy into 2009, a "mild" global recession, and "the deepest, broadest and most persistent financial crisis" the world has faced in decades.

The central bank forecasts real gross domestic product will expand 0.8% in the third quarter, followed by a contraction of 0.4% in the fourth quarter. Growth is expected to be flat in the first quarter of 2009 and to pick up to 0.8% in the second quarter.

Two successive quarters of contracting activity is technically considered a recession.

The bank believes Canada is starting from a better position of strength than many other countries going into the downturn, with a stronger labour market and better household and corporate balance sheets providing some support.

The "sky is not falling," bank governor Mark Carney said at a news conference after the document's release.

Still, it forecasts the economy will not do much better than flatline over the next couple of quarters as the global credit crisis will resolve slowly, putting the economy under strain.

Despite of the "healthy" position of Canadian financial institutions, the intensification of the global financial crisis has led to a "substantial" tightening of credit conditions in Canada, the bank said.

"Given the high degree of volatility and risk aversion in recent weeks, there is considerable uncertainty around any assessment of current credit conditions in Canada," the bank said. "In particular, it is difficult to measure the non-price factors that may limit the availability of credit."

Credit spreads between borrowing rates for financial institutions across curve and the expected overnight Bank of Canada interest rate spiked to around 200 basis points in early October.

While strong actions taken by central banks and governments to support financial institutions have lowered those spreads, the bank said they are likely only to recede slowly as confidence is gradually rebuilt.

Effective borrowing rates for financial institutions have, in fact, eased somewhat since August, thanks to the 225 basis points of cumulative interest rate cuts the bank has already implemented, the bank said.

"These indicative borrowing costs likely do not, however, adequately take account of the decreased availability coming from illiquid and risk-averse interbank markets," the bank admitted.

Non-financial firms, meanwhile, have had difficulty getting access to both short-term and long-term markets.

"Indeed, corporate debt and equity issuance have effectively stopped," the bank said.

The bank pointed out, however, that credit growth for Canadian households has slowed only slightly in recent months and there was little evidence terms or conditions have tightened significantly for household borrowers.

Still it sees growth of consumer spending receding after robust gains in recent years as real income declines with commodity prices, and household net worth takes a hit from sliding equity markets and a projected "modest" decline in house prices.

While it has been predicting a slowdown in housing activity and price gains for some time, the bank now says housing investment is declining more rapidly than it had expected. But it does not anticipate the same type of sharp housing contraction experienced by the United States.

The sharp decline in commodity prices has, like many, caught the Bank of Canada off-guard, and it is basing its projections on oil futures prices of US$81 to US$88 per barrel, though it projects a further 10% drop in non-energy commodity prices from current levels.

The bank has also revised down its estimate of Canada's potential output -- or the rate the economy can grow without generating inflation -- to 2.3% for 2008 and 2.4% in 2009.

The bank said it was encouraged by the loosening in global financial conditions in recent days. While one of the main risks to its outlook was that full recovery would take longer than expected, there is now the chance that measures governments and central banks have taken to restore liquidity and confidence will improve prospects more rapidly.

For the year as a whole, the bank repeated its Tuesday forecast that growth will average just 0.6% in 2008 and 0.6% in 2009 before picking up speed to 3.4% in 2010.

While the big jump in growth forecast for 2010 might seem sharp, it is not unusual by historical standards to see economies start to gain steam quickly once the worst of a crisis has past.