Canada Cuts Rate by 50 Basis Points


The Bank of Canada lowered its benchmark rate by half a point to revive an economy that's growing at its slowest pace in 16 years and signaled more easing may be needed.

The rate on overnight loans between commercial banks dropped to 3 percent, the lowest since December 2005, as forecast by 28 of 32 economists in a Bloomberg survey.

``Some further monetary stimulus will likely be required to achieve the inflation target over the medium term,'' the bank said today. ``The timing of any further monetary stimulus will depend on the evolution of the global economy and domestic demand, and their impact on inflation in Canada.''

The world's eighth-biggest economy will grow 1.4 percent this year, the bank said. That's the least since 1992 and slower than the bank's January forecast of 1.8 percent. Canada sends about three-quarters of its exports to the U.S., and the economic crisis in that country has sapped demand for Canadian lumber and cars.

The rate cut narrows Canada's biggest rate premium over the Federal Reserve's benchmark in four years, a gap that's kept the currency close to parity with the U.S. dollar. Traders anticipate the Fed will lower its 2.25 percent rate by a quarter of a point on April 30, as the U.S. economy may already be in a recession.

``U.S. economic conditions are going to soften and the Canadian economy will eventually slow down as well,'' Jacqui Douglas, economics strategist at TD Securities in Toronto, a unit of Toronto-Dominion Bank, said before the announcement. ``Rate cuts are needed.''

The Bank of Canada, on its own and in tandem with counterparts in the U.S. and Europe, has pumped billions of dollars into the financial system, accepted new collateral on loans and sought wider powers to tackle problems stemming from the U.S. subprime mortgage collapse.

Prices excluding eight volatile items -- the gauge used by policy makers to predict trends -- advanced 1.3 percent last month from the year before, the slowest since July 2005.

Overall consumer prices rose 1.4 percent in March from a year earlier, slower than U.S. inflation of 4 percent and German inflation of 3.3 percent.

The central bank releases an updated inflation and economic growth in two days, followed by a press conference by Governor Mark Carney.


Bloomberg
4/22/2008 6:46:58 AM