Fiona Anderson
Sun
Canada‘s central bank cut its overnight target rate to 25 basis points — 0.25 per cent — Tuesday, the lowest rate since the bank’s creation in 1934, and the lowest it can go.
The global recession has intensified, and measures to stabilize the global financial system have taken longer than expected to enact, the Bank of Canada said in a news release announcing the cut.
“As a result, the recession in Canada will be deeper than anticipated,” the release said.
The bank now predicts growth in Canada will contract by three per cent in 2009, a major adjustment from the 1.2-per-cent contraction it was forecasting in January. Growth in 2010 is now expected to be 2.5 per cent, down from the 3.8 per cent previously forecast.
The bank also took the unusual step of signalling that it planned to keep the rate at 0.25 until the end of June 2010 “conditional on the outlook for inflation.”
The bank has now cut its overnight target rate — which it does in an effort to stimulate the economy by making borrowing money easier and cheaper — by 4.25 percentage points since December 2007.
In its Monetary Policy Report on Thursday, the bank is expected to announce further initiatives to ease credit.
James Brander, an economics professor at the Sauder School of Business at the University of B.C., was not surprised by the rate cut.
“Although there are some positive signs, the economy is still struggling,” Brander said.
Brander said the bank’s January forecast of -1.2-per-cent growth in gross domestic product “was somewhat more optimistic” than other forecasts. The current prediction of a three-per-cent contraction is more reasonable, he said.
But British Columbia will likely fare better than the Canadian average, he said.
“The hardest hit sector, manufacturing, is not a sector we rely on,” Brander said.
Nor does B.C. rely as heavily on exports to the United States as does central Canada.
“A good chunk” of B.C.’s exports go to Asia and while Asia is also in a recession, it is not suffering as badly as the U.S., he said.
Ken Peacock, director of economic research at the Business Council of B.C., predicts B.C.’s growth will contract by about two per cent in 2009.
B.C. is less reliant on manufacturing and oil, which have been the hardest hit, he said. And B.C.’s largest export industry — forestry — has already fallen so far, there’s not much more to go.
David Andolfatto, an economics professor at Simon Fraser University, wouldn’t predict what B.C.’s GDP growth would be in 2009.
“But it seems likely it’s not going to be as bad as the average just because so much of that average is driven by what’s happening in central Canada,” Andolfatto said.
The bulk of the province’s economy is in services, “and services are relatively stable,” he said. “But we’re not going to be spared.”
How bad the province suffers will depend a lot on what happens to the demand for commodities, he said.
The million-dollar question is how strong emerging economies like China and India are going to be “because that’s where a lot of demand for our products come from,” Andolfatto said.
B.C. will suffer because it is linked to the world economy. which is suffering, he said.
“But that’s not a bad thing because when [the world economy] turns around it will pull us up as well.”
And the economy will turn around.
“If history is any guide, we’re going to recover.”
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