Bank of Canada cuts rates
TERRY WEBER
Globe and Mail Update
The Bank of Canada delivered its third interest rate cut of the year Tuesday but also broadly hinted that the end of the easing cycle may be at hand, saying the risks to the nation's economy "now appear balanced."
Tuesday's quarter percentage point reduction leaves the central bank's trendsetting target for the overnight rate at 2 per cent.
That rate is the central bank's key monetary policy tool. It tells major financial institutions the average interest rate that the Bank of Canada wants them to charge each other on overnight loans.
A change in that rate typically triggers a corresponding move by major banks on their prime lending rates. Royal Bank of Canada and Bank of Nova Scotia were the first out of the gate Tuesday, cutting their prime rate by a quarter percentage point to 3.75 per cent. Other banks quickly followed suit.
The central bank last cut rates on March 2 and Jan. 20.
But in Tuesday's accompanying statement, the bank suggested the latest move may be the last.
The bank's outlook remains unchanged from January, when it said it expects the economy to return to its production potential by the third quarter of next year, while core inflation should move back to the mid-point of its 1-to-3 per cent target by the end of 2005.
"Against this backdrop, the bank decided to lower the target for the overnight rate by a further quarter percentage point," the bank said Tuesday.
"The risks to the outlook now appear balanced."
The implication of that statement, analysts said, was clear.
"This is a rather transparent statement," Toronto-Dominion Bank senior economist Marc L轹esque told globeandmail.com.
"It's a very strong signal that they're not going to be easing further, as long as the economic landscape unfolds in line with their expectations. In other words, barring a disaster, you're probably not going to see the Bank of Canada cutting in June."
The markets had fully priced in the latest rate reduction, but at least some economists had remained unconvinced.
Those arguing against further rate reductions had cited the positive influence of a strong U.S. economy as a key factor. Earlier Tuesday, the U.S. government reported that March retail sales in that country rose by a much stronger than expected 1.8 per cent, offering another sign of economic strength south of the border.
Many also suggested recent economic reports, which appeared disappointing, weren't nearly as bad below the surface.
However, Tuesday's decision also comes as the broader Canadian economy appears to be growing well below the central bank's earlier forecasts.
In January, the economy shrank by 0.1 per cent. Even if it grows by 0.2 per cent in the two subsequent month, the first-quarter's overall annual growth rate would be around 2 per cent. The Bank of Canada had been expecting economic growth closer to 3 per cent in the quarter.
Later this week, the central bank releases its latest monetary policy report, which will offer a full picture of how it sees growth shaping up in the near future.
Outlining its reasons for Tuesday's move, the bank cited the Canadian economy's continued adjustment to developments in the global economy.
"These include stronger world demand, higher commodity prices, the realignment of world currencies, including the Canadian dollar, and the intensified competition, together with the new trading opportunities, coming from emerging-market economies," the bank said.
"These developments require shifts in activity among sectors and create a need for adjustments by many businesses."
A third rate cut, the bank said, helps those adjustments by "supporting aggregate demand, with the goal of keeping the economy near its full potential and inflation on target."
The Canadian dollar, which had dropped half a cent Monday in anticipation of another rate cut, was relatively steady Tuesday.
The loonie closed at 74.96 cents (U.S.), up 0.09 of a cent from Monday's closing price.
With further rate cuts now likely off the table, analysts were busy Tuesday looking ahead to the timing of the first interest rate hike.
Although some suggested that an increase late this year wasn't out of the question, most suggested the first move higher will likely be put off until early next year.
"We believed they will wait until 2005," Merrill Lynch economist Robert Spector said.
"Slack will disappear only slowly based on our forecast for 2.6 per cent [economic] growth this year and inflation is likely to remain below the 2-per-cent target until late 2005."
The Bank of Canada's next fixed-date policy announcement is due June 8.
TERRY WEBER
Globe and Mail Update
The Bank of Canada delivered its third interest rate cut of the year Tuesday but also broadly hinted that the end of the easing cycle may be at hand, saying the risks to the nation's economy "now appear balanced."
Tuesday's quarter percentage point reduction leaves the central bank's trendsetting target for the overnight rate at 2 per cent.
That rate is the central bank's key monetary policy tool. It tells major financial institutions the average interest rate that the Bank of Canada wants them to charge each other on overnight loans.
A change in that rate typically triggers a corresponding move by major banks on their prime lending rates. Royal Bank of Canada and Bank of Nova Scotia were the first out of the gate Tuesday, cutting their prime rate by a quarter percentage point to 3.75 per cent. Other banks quickly followed suit.
The central bank last cut rates on March 2 and Jan. 20.
But in Tuesday's accompanying statement, the bank suggested the latest move may be the last.
The bank's outlook remains unchanged from January, when it said it expects the economy to return to its production potential by the third quarter of next year, while core inflation should move back to the mid-point of its 1-to-3 per cent target by the end of 2005.
"Against this backdrop, the bank decided to lower the target for the overnight rate by a further quarter percentage point," the bank said Tuesday.
"The risks to the outlook now appear balanced."
The implication of that statement, analysts said, was clear.
"This is a rather transparent statement," Toronto-Dominion Bank senior economist Marc L轹esque told globeandmail.com.
"It's a very strong signal that they're not going to be easing further, as long as the economic landscape unfolds in line with their expectations. In other words, barring a disaster, you're probably not going to see the Bank of Canada cutting in June."
The markets had fully priced in the latest rate reduction, but at least some economists had remained unconvinced.
Those arguing against further rate reductions had cited the positive influence of a strong U.S. economy as a key factor. Earlier Tuesday, the U.S. government reported that March retail sales in that country rose by a much stronger than expected 1.8 per cent, offering another sign of economic strength south of the border.
Many also suggested recent economic reports, which appeared disappointing, weren't nearly as bad below the surface.
However, Tuesday's decision also comes as the broader Canadian economy appears to be growing well below the central bank's earlier forecasts.
In January, the economy shrank by 0.1 per cent. Even if it grows by 0.2 per cent in the two subsequent month, the first-quarter's overall annual growth rate would be around 2 per cent. The Bank of Canada had been expecting economic growth closer to 3 per cent in the quarter.
Later this week, the central bank releases its latest monetary policy report, which will offer a full picture of how it sees growth shaping up in the near future.
Outlining its reasons for Tuesday's move, the bank cited the Canadian economy's continued adjustment to developments in the global economy.
"These include stronger world demand, higher commodity prices, the realignment of world currencies, including the Canadian dollar, and the intensified competition, together with the new trading opportunities, coming from emerging-market economies," the bank said.
"These developments require shifts in activity among sectors and create a need for adjustments by many businesses."
A third rate cut, the bank said, helps those adjustments by "supporting aggregate demand, with the goal of keeping the economy near its full potential and inflation on target."
The Canadian dollar, which had dropped half a cent Monday in anticipation of another rate cut, was relatively steady Tuesday.
The loonie closed at 74.96 cents (U.S.), up 0.09 of a cent from Monday's closing price.
With further rate cuts now likely off the table, analysts were busy Tuesday looking ahead to the timing of the first interest rate hike.
Although some suggested that an increase late this year wasn't out of the question, most suggested the first move higher will likely be put off until early next year.
"We believed they will wait until 2005," Merrill Lynch economist Robert Spector said.
"Slack will disappear only slowly based on our forecast for 2.6 per cent [economic] growth this year and inflation is likely to remain below the 2-per-cent target until late 2005."
The Bank of Canada's next fixed-date policy announcement is due June 8.
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