The Bank of Canada cut its key overnight lending rate by three quarter of a percentage point earlier today to 1.5 percent. The last time the Bank of Canada pushed rates this low was 1958.
With the rate cut announcement, the Bank of Canada – for the first time – confirmed that the country was in a recession.
“While Canada’s economy evolved largely as expected during the summer and early autumn, it is now entering a recession as a result of the weakness in global economic activity,” read a statement released by the Bank.
The statement added that while the outlook for the economy had weakened due to the global recession, the aggressive rate cut was intended to boost sagging consumer confidence which is “prompting more cautious behavior by households and businesses.”
The next update on the Canadian economy is scheduled on January 22nd – just a few day before an expected vote on the Federal budget.
The Bank of Canada Operating Band
The Operating Band is the Bank of Canada’s primary monetary tool and consists of a spread of one-half of one percent with three interest rates determined by an upper and lower boundary, as well as a mid-point.
The upper limit of the Operating Band is the bank rate – this is the rate at which the Bank of Canada will lend overnight funds to financial institutions. This means that if a financial institution requires funds to cover its transactions, it can borrow from the Bank of Canada at the bank rate, or it can borrow from other banks at the overnight rate.
The lower limit of the Operating Band is the interest rate that the Bank of Canada will pay financial institutions that deposit excess funds with the Bank. This is always one half of one percent less than the rate at which the Bank lends funds.
