Finance & Business World

The Bank of Canada may keep its lending rate unchanged at a record low today as policy makers mull more aggressive, extraordinary measures designed to revive a shrinking economy.

Economists are almost split on whether Governor Mark Carney will keep the target rate for overnight loans between commercial banks at 0.5 percent or cut it to 0.25 percent. A slim majority — 13 of 25 economists in a Bloomberg survey — expect no change in the rate, with the other 12 calling for a quarter-point cut. The decision is due at 9 a.m. New York time.

“With interest rates already very low, the Bank of Canada may opt to pursue more unconventional initiatives,” said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto. “We are getting indications from other central banks that given the nature of other problems in financial markets, they are better addressed by credit easing.”

Carney has cut the rate from 4 percent since becoming governor in February 2008. Economists say another cut could disrupt the same money-market and banking operations that policy makers are trying to support during the biggest financial crisis since the 1930s. Another cut also wouldn’t give much help to an economy struggling with its first recession since 1992.

“Cutting rates further seems destined to cause more grief than it is worth,” said Stewart Hall, an economist at HSBC Securities in Toronto.

Policy Guidelines

The Bank of Canada said on March 3 it may cut rates again, and lay out guidelines for using “credit and quantitative easing” policies on April 23. Carney has also said he will reduce the bank’s growth projections in the Monetary Policy Report to be published Thursday. The central bank’s January report predicted a contraction of 1.2 percent this year and growth of 3.8 percent in 2010.

The bank aims to keep inflation at 2 percent and has said that a sluggish economy and lower commodity prices will keep increases in consumer prices below that pace until mid-2011.

Even with a record low overnight rate, the central bank’s April 13 survey of loan officers found those who said credit had become more expensive outnumbered those who said it was cheaper by a record 80 percentage points faxless payday loan.

The world’s eighth-largest economy probably contracted by 5.8 percent in the first three months of this year, the most since 1991, according to a separate Bloomberg survey of economists. Consumer confidence is also being eroded because companies have fired more than 2 percent of the country’s workers since October — a total of 356,600. It’s the fastest pace of job reduction since 1982.

Pressure Banks

Cutting the benchmark rate to 0.25 percent could disrupt returns on money-market funds that charge management fees of about 0.50 percent. As well, under the Bank of Canada’s current operations, a lower rate would push to zero the rate the bank pays on overnight deposits it accepts from commercial banks.

A cut in the central bank rate would also put pressure on commercial banks to lower the prime rate on loans for their best customers, even if their costs don’t fall, said Krishen Rangasamy, an economist at Canadian Imperial Bank of Commerce in Toronto.

“That’s a problem for chartered banks. This would reduce profit margins,” he said.

If the bank does cut its rate, it should narrow the discount on deposits so the return remains greater than zero, a shadow panel canvassed by the C.D. Howe Institute said April 16.

Keeping the rate unchanged may also be another signal the central bank won’t be “aggressive” right away with policies aimed to pump new money into the economy, said Michael Gregory, senior economist at BMO Capital Markets in Toronto.

Carney said after an April 1 speech that publishing the guidelines on quantitative and credit easing doesn’t mean their use is “preordained.”

“They will exhaust conventional tools before they move on to unconventional,” said Dana Peterson, an economist with Citigroup Global Markets in New York.

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