Bank of Canada holds overnight lending rate at 1/4 percent
Posted by Dave Robertson on Thursday, December 10, 2009
archived from December 9th, 2009
The Bank of Canada yesterday announced that they will keep it's overnight lending rate at 1/4 per cent and is expected to remain until end of second quarter 2010. The rate has remained unchanged since April 21 2009.
Have you ever stopped to think on why they change the overnight rate? What is the overnight lending rate anyway? One of the functions of the Bank of Canada is to set monitor and control certain economic conditions in order to promote growth and stability of the economy. This is part of their monetary policy decision making.
The overnight lending rate is the interest rate at which major financial institutions borrow and lend one-day (or "overnight) funds among themselves. The Bank of Canada sets a target level for that rate. The overnight rate is often referred to as the Bank'skey interest rate or key policy rate. They then set the Bank Rate 0.25% above the overnight rate. Here is an example from the BoC website:
The BoC will set a low overnight rate in an effort to promote consumer spending and to stimulate the economy. When interest rates are low, Canadians have less incentive to invest their cash in Savings or GICs or various Interest paying instruments, and they are more likely to spend their cash. It also becomes cheaper to borrow funds to consume now. A good example is to see all the low financing options on new car purchases. With all increased consumer spending, demand for goods and services increase and prices go up (inflation.) Another impact of a low interest rate is that foreign investors are less attracted to buy Canadian interest paying investments and they move their funds out of Canada into other countries where interest rates are more favorable. This causes the Canadian dollar to weaken against other currencies.
The opposite takes place when the BoC raises the overnight rate: Canadian consumers save more, borrow less, spend less, demand for goods and services goes down, and inflation decreases. Demand for the Canadian dollar goes up as foreign investors move more money into Canadian assets, and the Canadian dollar strengthens.
We can infer then from the BoC decision to keep rates low, that they have a view that we are not yet coming out of the recession. The government wants us to borrow more, and spend more to bolster the economy. The next BoC interest announcement date is scheduled for Jan 19, 2010.
How do you react to the low interest rates? Do you borrow more? Spend more?
The Bank of Canada yesterday announced that they will keep it's overnight lending rate at 1/4 per cent and is expected to remain until end of second quarter 2010. The rate has remained unchanged since April 21 2009.
Have you ever stopped to think on why they change the overnight rate? What is the overnight lending rate anyway? One of the functions of the Bank of Canada is to set monitor and control certain economic conditions in order to promote growth and stability of the economy. This is part of their monetary policy decision making.
The overnight lending rate is the interest rate at which major financial institutions borrow and lend one-day (or "overnight) funds among themselves. The Bank of Canada sets a target level for that rate. The overnight rate is often referred to as the Bank'skey interest rate or key policy rate. They then set the Bank Rate 0.25% above the overnight rate. Here is an example from the BoC website:
The opposite takes place when the BoC raises the overnight rate: Canadian consumers save more, borrow less, spend less, demand for goods and services goes down, and inflation decreases. Demand for the Canadian dollar goes up as foreign investors move more money into Canadian assets, and the Canadian dollar strengthens.
We can infer then from the BoC decision to keep rates low, that they have a view that we are not yet coming out of the recession. The government wants us to borrow more, and spend more to bolster the economy. The next BoC interest announcement date is scheduled for Jan 19, 2010.
How do you react to the low interest rates? Do you borrow more? Spend more?