Canada Cuts Rate a Half Point


The Bank of Canada cut its benchmark interest rate a half point, the first such move since 2001, and signaled 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.

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.

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.

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. Today it weakened 0.3 percent to 99.32 Canadian cents per U.S. dollar at 9:19 a.m. in Toronto.

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.

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.


TradingEconomics.com, Bloomberg
3/4/2008 6:40:10 AM