NEWS

The drop will benefit some mortgage holders, but will have little or no immediate impact on many corporate borrowers or credit card holders and will further reduce some interest rates paid to savers.

Dropping the interest rate is "a step forward" for the economy but the No. 1 priority is to restore order to the global financial system, Scotiabank chief executive Rick Waugh said at his bank's annual meeting in Halifax.

"There's a huge amount of incentives that the governments are putting in. But unless we get our financial sector stabilized, then all these incentives will not work as well," Waugh said.

Bank of Canada governor Mark Carney said earlier that even with the central bank's overnight rate at unheard-of lows, the stimulus provided by traditional monetary policy is likely not enough.

And Carney suggested the bank now sees recovery coming later than it had last projected, possibly in early 2010 instead of the third quarter of this year.

"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," Carney wrote in a statement.

From the outset, the central bank's January economic outlook had been described by many observers as overly optimistic, but Carney has said since then that the outlook acknowledged the potential upside and downside.

A lot depended on how the situation unfolded in the global financial system, Carney said at the previous rate setting on Jan. 20 -coincidentally the same day Barack Obama officially became president of the United States.

Obama and his administration have been quick to push for several massive stimulus efforts aimed at propping up the financial and automotive sectors and some hard-hit American consumers, such as homeowners who can't afford their mortgages.

While the Canadian economy as a whole has been shrinking dramatically as a result of lower U. S. and world demand for oil, gas, minerals and manufacturing goods, the Canadian banking system continues to be solid and the five biggest banks remain profitable.

The Bank of Canada didn't give examples yesterday of the type of quantitative easing it is contemplating to provide monetary stimulus to the Canadian economy, which shrank by 3.4% in the October-December quarter.

BMO deputy chief economist Doug Porter said the central bank is considering a process whereby it injects money into the financial system by buying up assets such as government bonds, asset-backed commercial paper and even corporate bonds directly.

"Simply put, the bank is preparing to pull out all the stops to support the economy," Porter said.

While variable mortgage rates tied to prime are being reduced, longer-term and fixed rates have not kept pace with the central bank's moves, partly because chartered banks are reluctant to lend into a recession for fear of failures and partly because their own borrowing costs are higher than would be expected.

"A lot of people will be interested in refinancing mortgages and it will spur a lot of first-time buyers," Rawson predicted.

The federal budget, yet to make its way through Parliament, offers $750 in tax relief for first-time home buyers while increasing the limit that can be withdrawn from RRSPs for down payments by $5,000.

By most measures, Canada's credit markets are in better shape than in most industrialized countries, although still far from normal.

Carney has noted that while Canada's chartered banks continue to lend, many other financial institutions have tightened their practices or shut down altogether, reducing the availability of credit as a whole.

Call Lisa Au for more information
Invis Mortgage Associate
P: (403) 681-0217
F: (403) 277-8079