Canada cuts rate 0.5% on US weakness, currency

04 March 2008 17:45  [Source: ICIS news]

TORONTO (ICIS news)--The Bank of Canada cut its overnight rate by 50 basis points, to 3.5%, due to the impact on Canada of the slowdown in the US economy and the strong Canadian dollar, it said on Tuesday.

 

The move comes on top of two 25-point cuts in December and January.

 

“There are clear signs that the US economy is likely to experience a deeper and more prolonged slowdown than had been projected in January,” the bank said and hinted at further rate cuts going forward.

 

“The deterioration in economic and financial conditions in the US can be expected to have significant spillover effects on the global economy,” it added.

 

The US market is critical for Canada, including chemicals manufacturers. Two thirds of the country's chemical production is exported and the US accounts for 80% of those exports.

 

“If this [cut] takes pressure of the currency and lowers the value of the Canadian dollar a bit than this would be really good for our members,” Michael Bourque, spokesman for Ottawa-based Canadian Chemical Producers Association (CCPA), told ICIS news.

 

Analysts said the relatively large cut - 50 points instead of an expected 25 points - came despite fears of rising inflation as Canadian domestic demand was still strong, capacity utilisation high and commodity prices continued to rise.

 

The latest Canadian GDP data showed underlying strength in the economy that would have indicated a 25-point cut, said Stephane Marion, an analyst with Montreal-based National Bank.

 

“They [the bank] upped the ante to provide more preventive medicine against the US economic slowdown,” Marion said.

 

“We have yet to deal with the impact of the US housing bust, which is impacting global credit markets, and this is an issue that the Bank of Canada is keeping an eye on.”

 

US economic data was deteriorating rapidly, with markets pricing in the probability of further 75-point rate cut by the US Federal Reserve Bank this month, he added.

 

The Bank of Canada’s next announcement for overnight rates is scheduled for 22 April.

By: Stefan Baumgarten
+1 713 525 2653

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