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Tuesday April 22, 2008 - 17:50:29 GMT
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BOC Rate Cut Has Economists Guessing About Next Move

12:10 04/22 (CEP News) Ottawa – 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.

The BOC 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 statement.

That marked a change from the wording of the previous statement in March, when the bank said further stimulus "is likely required in the near term."

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 – 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 Canada’s domestic economy before the next rate announcement on June 10 and the Monetary Policy Report in July. “Depending on how the data unfolds, we think that there’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 “around mid-2010,” 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, gmatthews@economicnews.ca, edited by Nancy Girgis, ngirgis@economicnews.ca

(END) ©CEP Newswires - ©CEP News Ltd. 2008. All Rights Reserved. www.economicnews.ca

Related recent stories:
(09:00 04/22) Bank of Canada Drops Overnight Target Rate to 3%
(07:36 04/22) Tuesday's Events: BOC Interest Rate Decision, U.S. Existing Home Sales
(18:02 04/21) Market Preview: Loonie and CGBs Unlikely to See Big Moves if BOC Cuts 50 bps

 

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