Talk about jolting everybody out of their complacency.
Right on schedule, the Bank of Canada today at 9 a.m. announced that they were lowering interest rates. What was unscheduled, though, is that the Bank slashed its overnight rate by 75 basis points. Everybody - virtually ever forecaster out there - had taken it as a done deal that they would cut by 50.
With today's decrease, the Canadian overnight lending rate (our central bank's benchmark) is 2.75 per cent. That is its lowest level since 1961. That is still a touch above the U.S. Fed Funds Rate, which is 2.5 per cent. But from the statement that went along with the announcement, it sounds like the Bank is open to keeping the cuts coming.
Before today's decision, we had followed into a comfortable pattern of the Bank-following-the-Fed. It was a recent pattern: The Bank of Canada did not raise rates as aggressively as the Federal Reserve through 2000, then they did not lower rates as aggressively in 2001. Since the Sept. 11 attacks, however, the general view has been that they were going to do what the Chairman Al and his friends did in terms of bringing rates down.
But apparently the Bank is showing a little muscle. Good thing. The Canadian economy certainly needs the help.
In Canada, we have had very few economic indicators on the post-attack period. Still, the pattern through the summer has shown employment languishing, exports down and manufacturing in trouble. Realistically, the fourth quarter is going to look even worse.
The menu for fixing things is pretty limited. Cutting taxes and increasing government spending probably will happen, but in a much more limited way. Unlike the United States, Canada has no plans to slam a tonne of fiscal stimulus into the system. Which means that the ball is really in the Bank's court.
The Bank of Canada apparently gets that, and the markets get that they get it.
The loonie surged by nearly 20 basis points within a few minutes of the announcement. A stronger economy makes it look that much more attractive. As for bonds, yields plunged and prices went up on the news of the 75 basis point cut. Falling interest rates always make fixed-income instruments look better.
The Federal Reserve makes a decision on rates in a couple of weeks.
Stay tuned.
Linda Nazareth is ROBTv's resident economist.