Grave business - my financial world

The Bank of Canada cut its benchmark interest rate by half a point and signaled further reductions are needed to offset a slump in exports to the U.S.

Mark Carney, in his first decision as governor, lowered the target rate for overnight loans between commercial banks to a two-year low of 3.5 percent, the biggest reduction since 2001. Thirteen of 26 economists surveyed by Bloomberg News predicted the size of today's 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 by the U.S. Federal Reserve, and may slow the Canadian dollar's advance that has battered manufacturers.

Canada's currency, which reached a record 90.58 Canadian cents per U.S. dollar on Nov. 7, weakened 0.4 percent to 99.39 cents at 4:21 p.m. in Toronto. The yield on the country's 10- year government bond rose 1 basis point to 3.63 percent.

“You can cut rates 50 basis points today and 50 at the next meeting and probably not do a lot of damage to the near term inflation outlook,'' said Andrew Pyle, investment adviser at Scotia McLeod in Peterborough, Ontario, a division of Scotia Capital Inc. “It's a fairly cheap insurance policy.''

Next Moves

The next Canadian rate decision is April 22. Today's easing 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. The premium has helped keep Canada's dollar close to a record.

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

“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 spillover effects on the global economy,'' the Bank of Canada said today.

Flaherty `Worried'

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.

“If we remain in status quo where similar risks prevail, it's reasonable to suggest we get another 50 basis points'' at the bank's next decision, said Stewart Hall, an economist for HSBC Securities Canada Inc. in Toronto.

The high currency also gives Carney room for big rate cuts, 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.

Source