Bank of Canada cuts key interest rate to 4.25%
Loonie tumbles below 99 cents US
Last Updated: Tuesday, December 4, 2007 | 10:58 AM ET
The Bank of Canada cut its key interest rate by a quarter of a percentage point Tuesday, citing the weak economic outlook for the United States.
The cut lowered the bank’s overnight lending rate — what banks charge each other for overnight loans — to 4.25 per cent. It’s the first cut in the central bank’s key rate in more than 3? years.
The chartered banks quickly lowered their prime lending rates by a quarter of a percentage point to six per cent.
The rate cut also led to an immediate drop in the Canadian dollar on foreign exchange markets. The loonie was off more than 1.3 cents to 98.66 cents US at 9:45 a.m. ET.
The rate cut will mean cheaper borrowing costs for Canadians with variable rate mortgages, lines of credit and other loans tied to bank prime rates.
The central bank said the Canadian economy continues to operate above its production capacity, which is putting some upward pressure on inflation.
However, the bank said a myriad of other factors are putting downward pressures on prices. The banks said credit market problems and anticipated losses on U.S. sub-prime mortgages have worsened since mid-October, and are expected to persist.
“There is an increased risk to the prospects for demand for Canadian exports as the outlook for the U.S. economy, and in particular the U.S. housing sector, has weakened,” the bank added.
The interest rate decision had been hotly debated by economists, with a close split between those who expected a cut Tuesday and those who expected the bank to cut on its next scheduled decision date of Jan. 22.
Some analysts said the central bank has given itself room to cut rates next month too. “The communiqué accompanying today’s decision also leaves the door open for a further quarter-point cut on Jan. 22, as the bank did not provide its past mantra that it ‘judges that the current level of the target rate to be appropriate,'” said TD Bank’s deputy chief economist Craig Alexander.
RBC senior economist Dawn Desjardins also thinks another rate cut is likely. “Our view that Canada’s economy, like its U.S. counterpart, is headed for a period of slower growth means that it is likely that the bank will cut the policy rate again early next year,” she said in a morning commentary.
Bank of Canada lowers key interest rate
Tuesday, December 04, 2007 – 09:18 AM
By: The Canadian Press and 680News staff
Ottawa – The Bank of Canada lowered its key interest rate a quarter of a percentage point to 4.25 per cent, Tuesday.
Lower inflation and worsening economic prospects were cited as reasons for the cut.
The bank said inflation was less of a concern since October’s consumer price index showed both total inflation and core inflation were below expectations at 2.4 per cent and 1.8 per cent, respectively — due in part to the strong Canadian dollar, which pushedprices down domestically.
The bank also said that while the economy continues to function above capacity, the worsening financial markets difficulties associated with the U.S. subprime mortgage crisis and the slowing U.S. economy are expected to hinder Canadian growth.
The next scheduled announcement for interest rates will be Jan. 22, 2008.
Worried central bank cuts rate
Dec 04, 2007 10:34 AM
THE CANADIAN PRESS
OTTAWA – Citing the dollar effect and worsening economic prospects, the Bank of Canada cut its key interest rate to 4.25 per cent Tuesday, a move that prodded the loonie down by more than one cent.
The central bank had been expected by many analysts to hold off on lowering rates until next month, especially after last week’s gross domestic product report showed annualized growth of 2.8 per cent in the third quarter, above the bank’s expectation of 2.5 per cent.
But the Bank of Canada stated Tuesday that a number of developments, including worsening expectations for the economy, have altered its outlook and prompted it to reduce its overnight rate by one quarter of a percentage point.
The Canadian dollar pulled back sharply following the decision, trading at 98.68 cents US at midmorning, down 1.30 cents from Monday’s close.
While the Canadian economy continues to operate above its long-term capacity, storm clouds are forming, the Bank of Canada said.
“The bank now expects inflation over the next several months to be lower than was projected,” it stated.
The financial-market turmoil stemming from the still unfolding subprime mortgage crisis in the United States has “worsened” and is likely to last longer than previously anticipated.
As well, Canadian exports are taking a hit due to the stronger dollar and the weakening U.S. economy.
“All these factors considered, the bank judges that there has been a shift to the downside in the balance of risks around its October projection for inflation through 2009.”
It was a dramatic reversal in the bank’s outlook for the economy, inflation and interest rates from July, when it increased its overnight rate to 4.5 per cent and hinted at further increases to rein in Canada’s fast-moving economy.
But that was before the dollar began taking off to record levels and debt markets seized up in August, causing the world’s central banks to spring into action to maintain liquidity and avert a deeper crisis.
Tuesday’s rate cut will be welcomed by Canada’s manufacturing sector, which has been hammered by the historically high dollar.
In a rare joint release, the Canadian Labour Congress and Canadian Manufacturers and Exporters had urged an interest-rate cut to relieve upward pressure on the dollar, whose high level they said will cause the economy to slow with little threat of inflation.
Lower interest rates typically increase economic activity by reducing the cost of business investment and consumer borrowing, but can stoke inflation – a peril which the Bank of Canada said has abated.
Tuesday’s statement noted that both the headline consumer price index and core inflation eased considerably in October, to 2.4 per cent and 1.8 per cent respectively.
Core inflation, excluding volatile energy and food costs, has been at or below the bank’s two per cent target for three straight months.
The bank said this reflects increased competitive pressures related to the dollar.
It gave no clue whether it views Tuesday’s 25 basis point cut as the first of a series or as sufficient to bring the economy into balance.
In its previous action on interest rates in July, it raised the key rate to 4.5 per cent after more than a year on the sidelines.
The bank’s next scheduled decision comes Jan. 22.
JPMorgan Canada economist Ted Carmichael said the Bank of Canada is taking a wait-and-see approach on further cuts – “an understandable and appropriate stance given the current high level of uncertainty about the economic outlook.”
But Carmichael expects “an extended period of very sluggish real GDP growth and core inflation well below the two per cent target,” and he predicts the central bank will cut the policy rate at each of its next three decison dates, down to 3.5 per cent by late April.