Canada will buy another 50 billion Canadian dollars (US$41 billion) in mortgages from the country's banks in an effort to maintain the availability of credit, the country's finance minister said Wednesday. Finance Minister Jim Flaherty's announcement follows a similar move last month to purchase up to CA$25 billion ($20 billion) in mortgages. The global credit crisis has restricted the ability of Canadians to obtain loans for mortgages, cars and investments, and Flaherty says he's been hearing increasing concerns about the availability of credit. He hopes the additional money will help free up money for loans. “Despite some improvement recently we have to expect an extended period of stress in global credit markets. This could limit the availability of credit to Canadian households and businesses in the months ahead,” Flaherty said. “Accordingly, I'm taking further action today. The government will purchase up to an additional $50 billion in insured mortgage pools by the end of our fiscal year.” Flaherty stressed the program does not involve troubled assets, but high quality assets that are already backed by a government guarantee. The assets are pools of mortgages that are usually sold to investors. Flaherty said they “will earn a modest rate of return.” In an indication of the uncertainty in the markets, Canada's private banks declined to pass on to consumers the full half percentage-point cut in interest rates announced by central banks around the world last month. The banks cut interest a quarter of a point instead. The banks have since passed on the full rate cut after the government announced the first bailout. Flaherty and Prime Minister Stephen Harper have stressed that Canada's banks are sound, well capitalized and less leveraged than their international peers. Harper has said Canada's banks are the world's strongest, citing a report by the World Economic Forum. The prime minister has maintained that Canada will avoid the mortgage meltdown and banking crisis that are hitting the United States and Europe hard. Separately, the Bank of England warned Wednesday that it expects inflation to fall below its target of 2 percent next year as the economy contracts, stoking expectations the Bank will slash interest rates again to ward off the risk of deflation. Inflation rose to 5.2 percent in September, boosted by fast-rising food and fuel prices. But commodity prices have now roughly halved since their summer peaks, causing consumer prices of many items to fall. On top of that, the British economy, which contracted by 0.5 percent last quarter, is widely expected to shrink even more in the current quarter. That would put the economy in a technical recession, defined as two consecutive quarters of negative growth. This ongoing economic downturn will curb Britons' demand for goods, causing prices to drop. “Inflation will fall below targets,” Bank of England governor Mervyn King told journalists, “but we aim to get back there in the medium term.” If the Bank of England does not cut rates, the risk is that inflation may fall into negative territory.
