INTEREST RATES: rate cuts

Canada's big banks, amid warnings of further economic deterioration and below-zero inflation, wasted little time yesterday in passing on the full measure of the latest interest-rate relief from the Bank of Canada.

They cut their prime lending rates by a half-point to a record low of three per cent. Also reduced were some fixed and floating-rate mortgages.

After being knocked for dragging their heels on matching previous Bank of Canada rate cuts, the banks this time began announcing prime rate reductions within minutes of the central bank's move, which saw its trendsetting overnight target rate trimmed by 50 basis points to a half-century low of one per cent.

TD Bank chief economist Don Drummond said the rapid rate-cut response this time reflects the fact that the chartered banks' short-term borrowing costs have eased.

However, he said "unfortunately" the chartered banks' longer-term borrowing costs haven't eased yet, and consumers shouldn't count on lower medium- or longer-term mortgage rates.

The cut in the prime rate, which takes effect today, will reduce borrowing costs on floating-rate loans -- including mortgages -- tied to prime and ease the debt burden for those with existing floating-rate loans.

The Bank of Montreal, which was the first to cut its prime rate, also announced a 30-basis-point reduction in a "special" five-year fixed mortgage rate to 4.49 per cent.

The need for further quick interest- rate relief was highlighted by the Bank of Canada, which again lowered its projections for the Canadian economy -- warning of a 1.2-per-cent contraction this year, twice what it had been previously predicting.

"The outlook for the global economy has deteriorated since the bank's December interest-rate announcement, with the intensifying financial crisis spilling over into real economic activity," the central bank said in announcing its rate cut.

"Major advanced economies, including Canada's, are now in recession, and emerging-market economies are increasingly affected," it added.

However, the Bank of Canada also projected that as rate cuts and injections of fiscal stimulus by governments take hold here and globally, Canada's economy will rebound sharply next year to post 3.8-per-cent growth, helped in part by the recent depreciation of the loonie.

The central bank left the door open for further rate cuts if needed, saying it "will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required."

(Source: Vancouver Province)