BOC Monetary Policy Report Update - Recession in 2009, Recovery in 2010

• Bank of Canada dramatically reduces Canadian economic growth forecasts
• Inflation expected to continue to moderate through 2009
• Economic growth expected to rebound to 3.8% in 2010, inflation to reach target by 2011.

Much has changed since the release of the Bank of Canada's last Monetary Policy Report Update in October. That release, in the midst of a heightened financial crisis, reflected on the growing evidence of a dramatic slowdown in economic growth in advanced economies and likely emergence of a global economic recession. The jury has come in on both of these questions as evidenced by the dramatic reduction in economic forecasts in today's Monetary Policy Report Update. Having stated their belief that the Canadian economy entered a recession in the fourth quarter of last year, the Bank expects to see a 1.2% decline in economic activity in 2009. Importantly, the Bank has reduced their forecast for near-term economic growth dramatically, with growth in the first quarter expected to decline by 4.8% (annualized) down from 0.0% in October. Moreover, falling commodity prices are expected to lead to the largest decline in real domestic incomes in Canada since 1982, causing a pullback in domestic demand as well as the export sector.

The rapid build up of excess supply in the Canadian economy will also slow inflation. Driven by the dramatic pull-back in energy prices, headline inflation is expected to be negative through the third quarter of 2009. Core inflation, is also expected to moderate, reaching a low of 1.1% in the final quarter of the year. A robust economic recovery in 2010 will drive inflation back towards the Bank of Canada's target, but it is not expected to reach it until early 2011.

In addition to updating their economic outlook, this MPR highlighted the attention the Bank of Canada is paying to both credit conditions and the flow of credit in Canada. As the Bank recognizes, “credit conditions remain better than those in other major countries” and credit has continued to flow to households and businesses. On the business side, the cost of raising funds in the market has increased dramatically and issuance has fallen dramatically. But this slack has been picked up by bank intermediated credit, and as a result the pace of total business credit rose in the final months of 2008. On the household side, the pull-back in the housing market has slowed the demand for mortgage credit, but lending to households remains well above long-term historical averages. As credit conditions have stabilized in financial markets, lower interest rates are being passed onto households through lower prime lending and mortgage rates, helping to mitigate the pressure on household finances.

Given the once again significant downward revisions to the economic outlook, the Bank's recent decision to cut by 50 basis points is put into broad perspective. As in the past, the uncertainty surrounding the economic forecast is heightened by the situation in financial markets and its feedback on real activity. While the Bank judges that the risks to inflation are roughly balanced, inflation is only expected to reach target after a sharp rebound in economic growth in 2010. In our view, the recovery in the Canadian economy is likely to be more protracted and the growth rebound will not likely be quite as robust in 2010. Given the increased risks to the domestic economy, we continue to expect a further 50 basis point reduction in the overnight rate when then Bank of Canada meets again in March. Rates should be expected to remain low well into 2010 when signs of the economic recovery have begun to take shape.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.