Canada set for ‘two lean years’?

The Bank of Canada has provided a bleak outlook on Canada’s economic future…

The bank slashed interest rates by half a percentage point Tuesday amid worrying signs that the economic slowdown could be steeper and longer than previously thought.

In a statement, the Bank seemed pessimistic: “Our expectations for the economy have darkened and we will probably need to cut rates at least once more to provide needed stimulus. Canada is in for two relatively lean years and the economy will not fully recover until mid-2010. The bank is now projecting a deeper and more protracted slowdown in the U.S. economy”.

But in an unusual reaction, Canada's chartered banks delayed for most of the day matching the central bank's reduction, suggesting growing unease with the state of financial markets.

The Toronto-Dominion Bank was first to act, after 5 p.m. ET, announcing a 50 basis rate cut to its prime lending rate to 4.75 per cent, followed by the other four big Canadian banks.

Monetary policy ‘losing steam’?

Dale Orr, managing director of Global Insight Canada, commented: "It's a fair question to ask if monetary policy is losing its steam. The last time the bank cut the rate by 50 basis points on March 4, short-term lending rates dropped in response, but five-year, and 10-year bond rates actually went up”.

The Canadian Real Estate Association added: “Consumers are not receiving the full benefits of monetary easing. Five-year conventional mortgages in Canada were 6.99 per cent prior to the central bank's latest action, just slightly above where they stood a year ago.

TD Bank chief economist Don Drummond explained: "There's a cost of funds issue that no doubt the banks have to wrestle with - the banks are reluctant to lend to each other because there's a default risk. We tend to think that the bank rate tends to set all the cost of funds, and it normally does, but it certainly hasn't been doing that lately."