Summary:
This article is about Bank of Canada’s cuts in their lending rate to charted banks. This is the seventh time Canada’s central bank has reduced their rate since last February. Now the short term lending rate is a barely noticeable 0.5%. In order to free up credit the bank has also inserted $40 billion in cash into the economy through assets swaps. Even with this and the low interest rates the economy persists to decline. Usually the charter banks reduce their prime rate when the Bank of Canada reduces theirs, however this is not happening. One of the reasons is the global credit crunch. Canadian banks are avoding risky loans during this recession thus prime rates are not lowering even when the bank rate is.
Connection:
The connection between this article and the textbook is bank rates. These rates are the amount of interest the Bank of Canada charges chartered banks that borrow money from them. This usually affects the prime lending rates which is the rate chartered banks charges its creditworthy customers. When the bank rates decrease, the prime rates should also decrease. However, this is not happening right now in Canada. The Bank of Canada has lowered their interest rate to a mere 0.5%. A decline in prime rates should be happening but it is not. Chartered banks are still worried about lending money to each other, firms and consumers in a time like this. Canada’s central bank is trying to lower the interest rates hoping the chartered banks will do the same to get consumers to spend again. When the interest rates are lower customers are more willing to borrow money and spend it. Their plan will not work that effectively for Chartered banks are not willing to decrease thier prime rates.
Reflection:
The Bank of Canada is trying to stimulate the economy by reducing their interest rates for chartered banks. In the past when these rates decline the prime rates usually follow. However, this is not what we are seeing. The chartered banks are reluctent to lend out thier money or reduce interest rate for they are worried and afraid. Even though, Canada's central is bank is trying to get people spending again by lowering their interest rate. Their plan will not work since the interest rates are still high. Consumers will just keep saving their money. Also the lowering the bank rates will decrease demand-deficient unemployment. This means if interest rates are lower, people will spend and demand more and manufacturers will need to hire more employees to produce goods. All of this can't happen because the banks are afraid. How can economic spending increase when chartered banks are reluctent to lower interest rate to help consumers to spend again ?
2 comments:
I think the concern with this issue is that if banks still don't start lending out money to potential investors then there won't be enough cash flow in the system. This might only deflate our economy even more. However the asset swaps seem to be like the transactions they talked about in the book. I think if the Bank of Canada is trying to increase transaction demands, the charter banks should go along, or the value for the money into saving the economy would not be wisely used. The other question is how much the charter banks will be put at a lost if they decided to start lending, following the lead of Bank of Canada, since the potential of harmful loans would not be totally based on the lending rate.
m sun
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After reading this article and reading your reflection upon it, I agree as to what you say. I agree that the bank needs to lower their interest and also lend money to investors. Even though the banks might not profit at first because of these decisions, buy in years to come, it will not only bring money back into the economy and bring us out of this recession but could also be profitable in the future. By knowing how to spend their money wisely and such, it would be like hitting two birds with one stone. Overall I believe that getting our economy out of this recession comes first than making profit.
Kathy Tang
Blk F
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