Bank of Canada Lowers Rates to 0.25%, Commits to Hold Until Q2 2010

The Bank of Canada surprisingly cut its target rate by 25 basis points to 0.25% on Tuesday, and committed to holding the rate at that level until the end of the second quarter of 2010. The deposit rate was left unchanged at 0.25%. Since December 2007, the bank has lowered interest rates a cumulative 425 basis points.

"With monetary policy now operating at the effective lower bound for the overnight policy rate, it is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities," the bank said in its statement.

The BOC revised its GDP forecast and now expects a 3% contraction in 2009. Its previous expectation was for a 1.2% decline. Inflation is expected to undershoot the 2.0% target until the third quarter of 2011, and a gradual recovery is now forecast to be delayed until the fourth quarter of 2009.

"By removing some of the uncertainty about the direction of interest rates over the next year, the Bank is working hard to boost the confidence of Canadian households and businesses with the goal of putting the economy on a firmer growth path," said Dawn Desjardins, assistant chief economist at RBC.

U.S. Treasury Secretary Says Most Banks Have Sufficient Capital

The majority of U.S. banks have more capital than they need, Treasury Secretary Timothy Geithner said before the TARP's Congressional Oversight Panel. Uncertainties surrounding the banking system have caused banks to withhold loans, the lawmaker said.

He also said the increased liquidity pumped into the toxic debt market is helping to determine values for illiquid securities. Uncertainty surrounding the true value of toxic assets is making it difficult for financial institutions to raise further capital, he said.

Fed's Hoenig Says Government Aid is Prolonging Cost and Length of Crisis

Government aid to financial institutions may raise the total cost of the crisis by not allowing insolvent firms to fail, according to Kansas City Fed President Thomas Hoenig. Testifying before the Joint Economic Committee, Hoenig urged lawmakers to hold back from pouring additional cash into large firms, as it could add to the "risks of prolonging the crisis and increasing its cost."

Despite record spending, confidence has not been restored to the U.S. financial system, he said. He also criticized the U.S. Treasury's doling out of TARP capital, which failed to adequately identify systemically important firms.

Fed's Kohn Says GDP to Fall Sharply, Sizable Risks to Inflation Ahead

Federal Reserve Vice-Chairman Donald Kohn said next week's release of the Commerce Department's advance GDP estimate for the first quarter of 2009 is expected to show another sizable decrease, and this recession is likely to be among the deepest and longest since World War II. Speaking in Delaware on Monday evening, Kohn said consumption appears to have steadied after a sharp drop in the second half of 2008.

Kohn also said the declines in sales and construction of single-family homes have abated, due in part to low mortgage interest rates and greater affordability of housing. Turning to the economic outlook, Kohn said the history of post-WWII recessions indicates that the recovery, once underway, will be strong. He added, however, that the most recent recessions in the early 1990s and in 2001 have led him to believe that this recovery will be "gradual."

U.S. Weekly Retail Sales Move Lower, According to ICSC

U.S. retailers saw a decline in weekly chain store sales for the week ending April 18, according to a survey from ICSC. ICSC and Goldman Sachs reported that U.S. chain store sales declined an annual 0.1%, compared to the previous week's 0.4% contraction. On a week-over-week basis, sales decreased 0.4% following a previous 0.8% gain.

Meanwhile, the Johnson Redbook retail survey recorded a 1.5% rise in sales in the first week of April versus March, and a 0.1% year-over-year gain.

IMF Expects $4.1 Trillion in Credit Losses Worldwide

Global losses from the credit crisis could exceed $4.1 trillion by the end of 2010, according to a report from the International Monetary Fund. The IMF raised its projection for $1.4 trillion in credit losses from U.S. financial institutions to a $2.7 trillion loss, while euro zone bank losses will increase by $750 billion through next year.

Consequently, the IMF is calling on countries to take stimulative actions to stabilize their financial systems. The report says that "...although progress is being made, further policy efforts will be required."

Canadian Wholesale Sales Drop Further in February

Canadian wholesale sales fell in February despite expectations for a rise, Statistics Canada reported. The 0.6% decrease to $41.0 billion was worse than the 1.0% rise expected by analysts and follows a 3.9% decline in January, which was initially reported as a 4.2% fall.

Statistics Canada said falling sales in the machinery and equipment trade group and the "other products" sector were major factors contributing to the decrease.

By Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it , with contributions from Erik Kevin Franco, This email address is being protected from spam bots, you need Javascript enabled to view it , Ernest Hoffman, This email address is being protected from spam bots, you need Javascript enabled to view it and Todd Wailoo, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it

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