Tuesday, March 04, 2008

Bank of Canada Slashes Prime Interest Rate 1/2 point!

Canada Cuts Rate a Half Point, Signals More `Stimulus' Needed

March 4 -- The Bank of Canada cut its benchmark interest rate a half point, the first such move since 2001, and signalled it will have to act again to offset a slump in exports to the U.S.

Mark Carney, in his first decision as governor, cut the target rate for overnight loans between commercial banks to 3.5 percent, the lowest since March 2006. Thirteen of 26 economists surveyed by Bloomberg News predicted the move.

``Further monetary stimulus is likely to be required in the near term,'' the central bank said today in a statement from Ottawa. Signs of economic slowdown in Canada are ``materializing and, in some respects, intensifying.''

Tumbling exports to the U.S. will limit 2008 economic growth to a seven-year low of 1.8 percent, the central bank says, and have erased the country's broad trade surplus for the first time since 1999. The bigger rate cut today also helps catch up with moves this year by the U.S. Federal Reserve, and may slow the Canadian dollar's advance that has battered manufacturers.

``There are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected,'' which will have ``significant spill over effects on the global economy,'' the Bank of Canada said today.

Canada's decision comes two days before meetings of the Bank of England, and the European Central Bank, where economists predict policy makers will keep rates unchanged.

``With further rate cuts clearly needed to insure against the downside risks from a rapidly softening U.S. economy, and since monetary policy acts with a lag, we see no reason for the Bank of Canada to wait,'' Jacqui Douglas, economics strategist at TD Securities in Toronto, said before the decision.

Fed Moves

The Fed is expected to cut borrowing costs again on March 18. Canada's benchmark is now half a point greater than that of the U.S., narrowing what was the biggest gap since June 2004. That premium has helped keep Canada's currency close to a record high.

The currency rose to a record 90.58 Canadian cents per U.S. dollar on Nov. 7 and has gained 26 percent in three years.

Canada sends about three-quarters of its exports to the U.S., making the two countries the world's biggest trading partners, and the high dollar makes those goods less competitive. The U.S. economic woes have sapped demand for Canadian lumber and automobiles, two of the five biggest exports.

Finance Minister Jim Flaherty said Feb. 15 he's ``worried'' about the economy in Ontario, the country's biggest province and factory hub, the same day a report showed automobile production plunged 25 percent in December -- the most since 1996.

Room for Cuts

The high currency also gives Carney room for a bigger rate cut, by making imports cheaper and holding inflation close to his 2 percent target. Excluding volatile items such as fresh fruit, inflation slowed to 1.4 percent in January, the least since July 2005. Policy makers focus on the so-called core rate as a guide to future trends, and its moderation suggests inflation may slow from January's 2.2 percent pace.

``The balance of risks around'' the Bank of Canada's January projection for inflation ``has clearly shifted to the downside,'' the central bank said today. The bank's January economic forecast predicted core inflation of 1.4 percent in the first quarter.

There are still signs that consumer prices might pick up again. Canada's jobless rate is at a 33-year low, wages are rising at the fastest pace in a decade, and companies are earning record profits.

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