Tuesday April 22, 2008 - 17:50:29 GMT
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CEP News - www.economicnews.ca
BOC Rate Cut Has Economists Guessing About Next Move
12:10 04/22 (CEP News) Ottawa â€“ The Bank of Canada trimmed another
50 basis points from its key overnight lending rate Tuesday, dropping
the rate to an even 3% and leaving economists divided over whether the
central bank is nearing the end of its easing cycle.
cited global financial market turmoil and weakening growth worldwide in
announcing its decision, but toned down the wording that it uses to
signal that more rate cuts are on the way.
"Some further monetary stimulus will likely be required to achieve the
inflation target over the medium term," BOC said in its official
That marked a change from the wording of the previous statement in
March, when the bank said further stimulus "is likely required in the
The size of the next cut and when it will come depends on the response
of the economy to the rate trimming that has already taken place, the
Bank of Canada said Tuesday.
"Given the cumulative reduction in the target for the overnight rate of
150 basis points since last December, the timing of any future monetary
stimulus will depend on the evolution of the global economy and
domestic demand, and their impact on inflation in Canada," the BOC said.
The tone of the press release was less dovish than last month and
hinted that the Bank may be nearly through cutting rates, said BMO
deputy chief economist Doug Porter.
The Bank of Canada has moved aggressively, said Porter, and the
statement twice noted the cumulative 150 bps of rate cuts to date â€“ a
big insurance policy to limit the downside for growth. "While we still
look for another modest trim in rates at the next decision date on June
10, that may be the end of the line for rate cuts, especially if credit
conditions stabilize," he added.
Ending the credit easing cycle now would be the wrong thing to do, said
Laurentian Bank economist Sebastien Lavoie, who added that the global
economic slowdown and financial turmoil are far from over. "I don't
think they should ease off on the pedal here."
Markets will be confused by the Bank of Canada's statement, he said.
The document began by noting that the global economy has weakened, the
slowdown in the U.S. is deeper and more protracted than expected and
that inflation is under control, Lavoie said. However, the statement
suggested the bank may skip a rate cut at its June fixed date, he
added. "I find that very surprising. My view is that they should
continue to go for it."
The BOC statement "still leaves the door open to further downward
adjustments in the policy rate," said RBC senior economist Dawn
Desjardins, adding the degree of future easing is likely to be limited.
"We look for the bank to lower the overnight rate in June to 2.75% and
then look for policy-makers to shift to the sidelines for the remainder
of the year."
Scotiabank economist Karen Cordes said she interpreted the Bank of
Canada statement as leaving the door open for future cuts, and added
that she still expects one more 25 basis point reduction in the
overnight rate in June.
For Cordes, the big surprise in the announcement was the fact that the
Bank of Canada pushed out the date for inflation to remain under 2%
until 2010. "That's in line with our expectations," she said, and
signals that, from the central bank's point of view, the fear of rising
inflation is "dead until 2010."
Jacqui Douglas, an economics strategist from TD Securities, said that
despite the fact the bank softened its stance on possible further
stimulus, she thinks it is likely some "cracks will begin to appear" in
Canadaâ€™s domestic economy before the next rate announcement on June 10
and the Monetary Policy Report in July. â€śDepending on how the data
unfolds, we think that thereâ€™s still scope for another 50bp rate cut
from the Bank of Canada at the next FAD in June," Douglas added.
In its official statement announcing the rate reduction, the Bank of
Canada said growth in the global economy has weakened, reflecting the
effects of a sharp slowdown in the U.S. economy and continuing
dislocations in global financial markets. "Growth in the Canadian
economy has also moderated as buoyant growth in domestic demand,
supported by high employment levels and improved terms of trade, has
been substantially offset by the fall in net exports," the BOC said.
The BOC added it is now projecting a deeper and more protracted
slowdown in the U.S. economy, and that will have "direct consequences
for the Canadian economic outlook" with declining exports projected to
exert a significant drag on growth throughout 2008. Tightening credit
conditions will also squeeze business investment and consumer spending,
the bank said.
"Nevertheless, domestic demand is projected to remain strong, supported
by firm commodity prices, high employment levels and the effect of
cumulative easing in monetary policy," the BOC added.
The central bank said it expects the Canadian economy to grow by 1.4%
this year, 2.4% in 2009 and 3.3% in 2010, and move into excess supply
in the current fiscal quarter. A gradual U.S. recovery, a return to
more normal credit conditions and accommodative monetary policy should
generate above-potential growth and bring the economy back into balance
â€śaround mid-2010,â€ť the statement said.
Inflation will remain below target this year and next, the bank
projects, with both core and total inflation moving back up to 2% in
2010 "as the economy moves back into balance."
The bank said there are both upside and downside risks to its inflation
projections, adding that "these risks appear to be balanced."
The Canadian dollar plummeted immediately following the rate decision,
dropping almost a full cent to 0.9850 USD. By noon, it had more than
recovered its losses and was trading at 0.9974 US.
By Geoff Matthews, [email protected], edited by Nancy Girgis, [email protected]
(END) Â©CEP Newswires - Â©CEP News Ltd. 2008. All Rights Reserved. www.economicnews.ca
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