Financial Update

Bank of Canada drops its rate to lowest level since 1958

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The links between now and 1958

Jacqueline Thorpe, Financial Post Published: Tuesday, December 09, 2008 In these times of economic 'crisis' it bears keeping in mind how little things change: economies boom and bust all the time.

For example, the last time Canadian interest rates were as low as they are today was in 1958 when Canada was emerging from recession. The economy, valued at about $32-billion at the time, was carried higher by a huge investment boom throughout the mid-1950s. Growth rates reached as high 9% in 1955 and 1956.

Then the boom went bust. The unemployment rate, which was 3.4% in 1956 hit 7.2% in 1961; growth slowed to about 1% as business spending fell off a cliff.

While business was retreating into a shell, consumers and governments led the recovery.
"Encouraged by an amply supply of mortgage funds, expenditures for residential construction reached an all-time high," the Canada Year Book for 1959 says.

The federal government, as it is contemplating today, shifted from a moderate surplus to a large deficit, playing "an important sustaining role in the economy." It raised spending on goods and services and increased transfer payments -- largely on employment insurance and other benefits.

By the middle of 1959 the economy was in full swing with growth expanding at 7% over 1958. Business investment surged. There was trouble brewing between the Bank of Canada and the government however.

While unemployment was still high and inflation low, James Coyne, Governor of the Bank of Canada, spied trouble ahead, especially in excessive spending and current account deficits, and tightened monetary policy.

The strategy was at odds with the government, which eventually tried to fire Mr. Coyne, ostensibly over his pension. He refused, but after the Senate found no misconduct on his part, he eventually resigned over the government's interference.

Now the Bank of Canada is fully independent from the government, so current governor Mark Carney should have no trouble raising rates again -- when he believes the time is right.

The FP article below discusses TDCT, however the same now applies to CIBC, RBC, BMO and Scotiabank

Canadian banks break ranks by holding back rate cut

Eoin Callan, Financial Post TD has decided to pass on to customers only part of the hefty cut in interest rates by the Bank of Canada.

The bank will pocket a third of the rate cut to improve its own profit margins, while customers will see the prime lending rate reduced by only .5 per cent, instead of the full .75 per cent rate cut announced by the central bank.

The decision is controversial because it comes at a time when governments and central banks worldwide are pumping liquidity into markets in a bid to make credit more available to consumers and businesses.

The Bank of Canada explained Tuesday that it was cutting rates by the most in years because the economy was sliding into a recession as the global outlook worsened.

But the impact of the monetary stimulus is lessened if banks only pass on part of the rate cut.
The move is also politically charged because of moves by the government to bring funding costs for banks down, including guaranteeing new borrowing by banks in international credit markets.
Yet bank executives say the cost of funding in international markets remains extraordinarily high.

Yet there have also been signs that TD has been looking for some time at breaking with the tradition in Canada of banks cutting the prime rate in lock step with the Bank of Canada.

In research papers and interviews the bank has been a leading advocate of the view that Canada is moving towards a model seen in other countries where institutions pick and choose how much of a rate cut to pass on to consumers.

This is creating new competitive dynamics in Canada's retail banking market that have little precedent, with rival banks watching each other closely and engaging in an elaborate game of chicken to determine who will cut most.