Bank of Canada slashes interest rates KEVIN CARMICHAEL
Globe and Mail Update
March 4, 2008 at 9:12 AM EST

OTTAWA — The Bank of Canada dropped its key lending rate by half a percentage point, and indicated that further cuts will be needed to insulate Canada from the effects of a U.S. economy that teeters on the brink of recession.

“The deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy,” the central bank said in its statement Tuesday.

“Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2 per cent inflation target over the medium term”, the bank said.

Mark Carney's first policy decision as governor left the Bank of Canada's benchmark interest rate at 3.5 per cent. The central bank last reduced borrowing costs by a half point in November 2001 and has adjusted interest rates by that magnitude only four times since moving to a fixed announcement schedule in March 2000.

Bank of Canada Governor Mark Carney is seen here making his way from Parliament Hill to the Bank of Canada in January. (The Globe and Mail)

The Bank of Canada cut its key rate by half a percentage point on Tuesday Mr. Carney and his five deputies on the Governing Council next fix interest rates on April 22. The decision by the central bank to get more aggressive after quarter-point reductions in December and January shows policy makers doubt Canada's strong domestic economy will hold up next to weaker demand from the country's largest trading partner.

Canada's gross domestic product grew 0.8 per cent in the fourth quarter, the slowest in 4 ½ years and half as much as the Bank of Canada was expecting. The U.S. economy, which consumes some 80 per cent of Canada's exports, was even weaker in the fourth quarter, advancing at a 0.6 per cent annual rate.

“There are clear signs the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected in January,” the central bank said in the statement, citing the housing market, which is suffering the biggest collapse in generation.

“These developments suggest that important downside risks to Canada's economic outlook that were identified in (January) are materializing and, in some respects, intensifying.” The Bank of Canada sets interest rates to keep inflation advancing at about 2 per cent a year, and uses a measure that strips out volatile prices such as energy to predict where costs are heading.

Canada's core rate of inflation was 1.4 per cent, leaving plenty of room for today's half-point cut, economists said before the announcement.

While conceding that Canada's domestic demand remains “buoyant” and that companies were producing above capacity, policy makers determined the bigger worry is economy won't generate enough activity to keep inflation at its 2 per cent target.

“The bank now judges that the balance of risks around its January projection for inflation has clearly shifted to the downside,” the Bank of Canada said.

OTTAWA - The number of Canadians intending to buy a home is at the lowest level since 2002, according to RBC Royal Bank's annual homeownership survey released Tuesday.

The survey results indicated that overall those "planned to buy a home" within the next two years has declined five percentage points to 23 per cent. The number "very likely" to buy a home has fallen from nine per cent in 2007 to seven per cent in 2008 - the lowest level since the survey began fifteen years ago.

The survey authors suggest there are signs of a slowdown in the housing market as the number of Canadians who would 'buy now' rather than waiting until next year fell from 58 per cent in 2007 to 52 per cent in 2008.

"I'm not surprised by the results. We've had a really long, strong real estate market and this is not a dramatic drop." said Catherine Adams, RBC Royal Bank's vice-president, home equity financing. "It's really just saying things are starting to cool down. People are ... being a bit more cautious."

Adams suggested that Canadians remained optimistic about the housing market - but that they were merely less optimistic than last year.

"I think it's a healthy economy, it's a very healthy real estate market, very healthy mortgage lending practices within Canada." said Adams.

According to the RBC survey, 56 per cent of respondents also anticipate house prices will rise. In 2007 that figure was 59 per cent.

More respondents also believe their mortgage rates will change. A total of 46 per cent believe rates will rise compared with 43 per cent in 2007. However, the numbers who anticipate a cut in the cost of their home loan rose seven percentage points to 23 per cent in Tuesday's survey.

Survey respondents in Quebec bucked the downward trend with those likely to buy a home in the next two years rising two percentage points to 21 per cent. The numbers very likely to buy a home were at nine per cent in Saskatchewan and Manitoba followed by Alberta at eight per cent. Around seven per cent of respondents in B.C., Ontario and Quebec said they were very likely to purchase a home in the next two years with just five per cent in Atlantic Canada saying they expected to be in the market for a home.

The online survey is based on a randomly selected representative sample of 3,023 adult Canadians. With a representative sample of this size, the results are considered accurate to within plus or minus 1.8 percentage points, 19 times out of 20.