Tuesday, January 20, 2009 0 comments ++[ CLICK TO COMMENT ]++

Bank of Canada cuts rates to 1%



Bank of Canada just cut rates to 1%, and as you can see from the chart above, most of the central banks of the world are cutting rates.

It is quite possible that we may end up in an environment similar to the 30's and 40's, when rates stayed low for decades. But do note that the environment was quite different at that time, with world wars, price controls, very little capital flows across the world, gold standard in most of the world, and so on. Nevertheless, the situation is somewhat similar to that time period. Obviously this goes against the popular re-flation or hyperinflation thesis pursued by some that all this is going to lead to high inflation. It is difficult for me to see high, susutained, price inflation. If anything, I think investors may end up being surprised, not by a quick rise in prices but, by how low prices, such as commodity prices can drop.


The Canadian government is also supposedly trying to change laws so that it can invest in banks. It seems that the banks are requesting the change in order to allow foreign central banks and soverign wealth funds to invest. Right now it seems that foreign governments or agents of foreign governments can't own the banks.

Canadian banks, unlike banks in most of the developed world, have largely avoided being infected by the Subprime Virus or getting entangled with hedge funds, private equity, and other leveraged entities. Yes, they have taken losses but it's nothing like what some American or European banks have reported. So, barring any negative surprises, it is unlikely that the Canadian government will take stakes in the banks.

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