On March 3, 2009, the Bank of Canada (BoC) announced a rate drop which brought the overnight rate down to 1/2%.   At the time, it was the consensus that this was going to be the last rate reduction until the economy recovers in 2010.  In that announcement, however, the BoC hinted at a possibility of one more rate drop.   The Bank stated that  the overnight rate can be expected to remain at this level “or lower “.  The “or lower”  part of the press release leaves open the option to reduce the overnight rate one last time.

Here is a summary of what the banks are forecasting:

• BMO favors one more rate reduction to 1/4 percent in April 2009 – BMO Capital Markets Rate Scenario dated March 4, 2009
• CIBC World Markets forecasts the BoC to hold the overnight rate at its current level of 1/2% -  CIBC World Markets Market Call dated March 2, 2009
• RBC forecasts the BoC staying at its current level of 1/2% – RBC Financial Market Forecast dated Mar 12, 2009
• Scotia Bank and TD Bank did not provide an interest rate forecast in March.  TD prepared a report entitled “The Perils of Ultra-Low Rates: The Canada Case“.  While there are precedents from other countries (e.g., Japan’s interest rate at 0.10%, US at 0.00-0.25%), problems could arise when interest rates approach close to zero.  There are implications for investors who will be earning close to nothing when investing in the money markets.   There are also implications for bank financing that is tied to the prime rate.

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