December 5, 2007

Rate cut in Canada

by Richard Kilner

Story link: Rate cut in Canada

Interest rates have been cut by the Bank of Canada to 4.25%, a decrease of 25 basis points. The move has occurred due to the bank’s belief that the US subprime mortgage crisis, and the corresponding effects on the financial markets, will be longer lasting than previously thought.

According to the BOC, the US economy’s slowdown will lessen demand for Canadian exports, whilst in Canada credit costs have continued to rise.

The Canadian dollar fell substantially at the unexpected cut in rates, which is the first since April 2004.

Manufacturers and exporters, who had been suffering from the strength of the Canadian dollar, will welcome the news.

Eric Lascelles, TD Securities’ chief economics and rates strategist, has stated his belief that the move will affect a large number of people, easing borrowing by businesses, improving prospects for exporters and benefiting the consumer.

Upon hearing the news Canadian Imperial Bank of Commerce immediately made a corresponding cut in its own prime lending rate, down by 0.25% to 6%.

Most primary securities dealers had expected a cut in rates, but towards the end of January rather than now.

The next decision by BOC is unknown, and will be the last made under Governor David Dodge who is to be succeeded by Mark Carney on 1 February.

Prior to the rate cut the Canadian dollar stood at C$1.0045 to the US dollar, falling to C$1.0100 after the announcement was made.

Inflation in October fell below the bank’s forecast, and has been blamed on the Canadian dollar’s strength. Below forecast inflation is predicted to continue for the next few months.

Rumours of a rate cut had increased following September, whenthe lowest trade surplus since 1998 was recorded.

However, Canada’s economy has shown itself to be more robust than some had thought, with a third quarter growth of 2.9% in spite of the US subprime crisis.

Jacqui Douglas, economics strategist at TD Securities, said it was unsurprising, and wise, for the bank to keep its options open, given the recent financial market volatility.