| |
October 16, 2007
Bank of Canada projects lower growth in '08, keeps rate unchanged
OTTAWA - The Bank of Canada has kept its key overnight rate unchanged at 4.5 per cent, saying it is less worried about inflation and projecting a marked slowdown in the Canadian economy next year.
In an unusually fulsome announcement, the central bank cites a series of conflicting and changing economic and financial indicators that suggest it may remain on the sidelines in terms of interest rates for some time.
The Canadian economy, it said Tuesday, is running further above its production potential than previously forecast, fuelled by robust global growth and strong commodity prices.
But the Canadian economy is headed for a sharp downturn, the bank predicts.
The deepening U.S. housing crisis will cut into the U.S. economy even further and the bank now projects growth south of the border will average a meagre 1.9 per cent this year and 2.1 per cent next.
That, along with the Canadian dollar soaring above parity with the greenback, and tight credit stemming from the summer financial market turmoil, will also start to cool Canadian growth as U.S. demand for Canadian exported goods dwindle.
As such, the bank has hiked its projected growth for the Canadian economy for this year from 2.5 per cent to 2.6 per cent, but said the economy will slow markedly to 2.3 per cent next year and 2.5 per cent in 2009. In July, the bank had said growth in Canada would average 2.6 per cent next year.
"In line with this projection, the bank judges, at this time, that the current level of the target for the overnight rate is consistent with achieving the inflation target over the medium term," it said in the statement.
But in fact interest rates are higher than would be assumed, the bank said. Following this summer's subprime mortgage meltdown in the U.S., the bank said the cost of borrowing for firms and households a quarter-point higher than assumed prior to tightening credit conditions.
The central bank noted that although inflation has been running ahead of its two per cent target for more than a year, it expects that both core and total inflation will return to the target by the second half of next year.
"There are significant upside and downside risks to the bank's inflation projection," he adds.
On the upside, excess demand in the Canadian economy would persist longer than projected because of higher consumer spending and lower productivity growth.
On the downside, the loonie, which is running well above the bank's previous forecast of 93 to 95.5 cents US, could remain above the 98 cents US level the bank is not projecting, and the spillover from the U.S. housing slump would be greater than expected.
"All factors considered, the bank judges that the risks to its inflation projection are roughly balanced, with perhaps a slight tilt to the downside," it said.
The bank last changed its key rate on July 5, when it hiked interest rates from 4.25 per cent to 4.5 per cent. The bank's next scheduled date for announcing interest rates is Dec. 4.
Sunday, October 14, 2007Dan Wilchins and Patrick Rucker Reuters
Banks to set up $80 billion fund to limit credit crunch
NEW YORK/WASHINGTON (Reuters) - Major banks including Citigroup Inc are looking at setting up a roughly $80 billion fund to buy ailing mortgage securities and other assets, in a bid to prevent the credit crunch from further hurting the global economy, sources familiar with the matter said.
Representatives from the U.S. Treasury have organized conversations among top global banks, sources said, as financial institutions grow increasingly concerned that a certain type of investment fund linked to banks may have to dump billions of dollars of repackaged loans onto financial markets.
A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and in the worst-case scenario tip the U.S. or Europe into recession.
The fund is the latest response to a global credit hangover after at least three years of easy credit that fueled massive mortgage lending in the United States and spurred record levels of leveraged buyouts.
"Banks made unwise business decisions, and now they're scrambling to save themselves," said Steve Persky, chief executive at Dalton Investments in Los Angeles, which has $1.2 billion under management.
Citigroup, JPMorgan Chase & Co. and Bank of America Corp. are involved in the discussions, according to people familiar with the situation. The three banks declined to comment.
The U.S. Treasury is involved in the discussions, but taxpayer money is not expected to be used.
The Financial Services Authority, the U.K. market regulator, has suggested U.K. banks consider participating in the fund, the Wall Street Journal reported on Saturday, citing a person familiar with the situation.
A spokesman for the FSA declined to comment on Sunday. Swiss financial services regulator EBK also declined comment.
Spokesmen for British bank HSBC and Swiss bank UBS had no comment when asked about their involvement.
Details concerning the fund the banks are setting up, including its size, are still being hammered out and may change as other banks and investors become involved, sources said.
The fund that is being contemplated would bail out funds known as "structured investment vehicles," or SIVs.
SIVs bought assets like mortgage securities from banks, and financed their purchases using short-term debt known as commercial paper. They make money by earning more from their investments than they have to pay to fund them.
But if SIVs cannot sell commercial paper, they must sell their assets, and many of the assets do not trade often and would be hard to sell.
The idea for a fund was first broached at a meeting at the U.S. Treasury on a Sunday in mid-September in Washington, D.C., according to a person familiar with the details of the meeting.
That meeting was led by Robert Steel, U.S. undersecretary for domestic finance, and Anthony Ryan, U.S. assistant secretary for financial markets. The informal meeting lasted four and a half hours as banks came up with ideas to jump-start the short-term lending markets.
Outstanding commercial paper has dropped since the summer. According to the U.S. Federal Reserve, there was $1.865 trillion in commercial paper outstanding in the week ended October 10, down from $2.187 trillion outstanding in July.
The government-led discussions are similar to conversations the Federal Reserve Bank of New York conducted in 1998 to help organize the bail-out of hedge fund Long-Term Capital Management. Taxpayer funds were not used to bail out Long-Term, either.
Banks including Citigroup, Merrill Lynch & Co, and UBS have in recent weeks announced billions of dollars in asset write-offs and are still struggling to sell off billions of dollars in loans that financed acquisitions globally.
"We are coming off the greatest lending bubble ... in U.S. history. We will feel its impact for a very long time," said Robert Arnott, Chairman of Research Affiliates LLC in Pasadena, California, earlier this month.
(Additional reporting by Steve Slater in London and Tom Atkins in Zurich)
© Reuters 2007
|
|
Home