In Canada, One Signal of 2008 Financial Crisis Is Flashing Again

Does Canada Need Another Rate Cut?
  • Expectations for policy rates dropping faster than bank rates
  • Difference between the two spikes to highest since early 2009

In Canada, one of the first corners of the financial markets to start going haywire in the lead-up to 2008’s financial crisis is acting up again.

The difference between a measure of the rate at which Canadian banks are willing to lend to each other and short-term instruments reflecting expectations for the Bank of Canada’s benchmark spiked to the widest in seven years. The gap on Jan. 16 reached 50 basis points, or 0.5 percentage point. That’s the most since January 2009, when the world was in recession and just emerging from the previous year’s credit crunch.

The same move was seen in the buildup to that crisis. Where then it was led by a leap in borrowing costs between banks and large corporations, called the Canadian dollar offered rate, now it’s being led by a drop in overnight index swaps on speculation the central bank will cut its official rate as early as Wednesday. That rate now stands at 0.5 percentage point.

While last week’s jump doesn’t compare to the worst of 2008, and doesn’t portend a credit crunch, it suggests Canadian banks may find it harder to pass on the benefits of a central-bank rate cut with the country in the center of a global panic over slowing growth and collapsing oil prices, according to David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. Oil is one of the country’s biggest exports.

"The markets are telling you there could be some risk of financial contagion," he said by phone from Toronto. "And Canada certainly has a ‘For Sale’ sign on the front lawn."

Before it's here, it's on the Bloomberg Terminal. LEARN MORE