Fed likely through cutting: BMO
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• Web Sites: Bank of Montreal
By TERRY WEBER
Globe and Mail Update
The U.S. Federal Reserve's campaign of interest rate cuts has likely come to a close and central banks around the world — including the Bank of Canada — will soon follow suit as the global easing cycle wraps up, the Bank of Montreal said Friday.
In its latest international economic review, the bank said the Fed — which cut rates by another 25 basis points on Tuesday — has done enough to ensure a recovery next year.
Other central banks including the Bank of Canada and the European Central Bank are still expected to cut further, but the global campaign to stimulate world economies with lower interest rates is near an end as a U.S. recovery helps buoy nations around the world.
"In Canada, this [pick up in U.S. exports and confidence] will be the primary factor in pulling the economy our of a two-quarter recession, though stimulative monetary and fiscal policies will also play a role," BMO said.
The Bank of Canada's next scheduled date for announcing policy interest rates is Jan. 15. The Canadian central bank cut its benchmark interest rate late last month by half a percentage point to 2.25 per cent, the lowest level since September, 1960.
Since the beginning of the year, the Bank of Canada has cut interest rates by 3.5 percentage points, dropping the key overnight rate from 5.75 per cent, the steepest round of cuts since 1995-96 in the aftermath of the Mexican peso crisis.
Last month, a panel of U.S. economics formally declared a recession in that country dating back to March. The Fed has already cut interest rates 11 times to help boost that country's economy, which has been struggling to regain its footing following the devastating terrorist attacks of Sept. 11.
In Canada, third-quarter gross domestic product — the broadest measure of economic activity — contracted and most economists expected a weaker performance in the fourth quarter. A recession is technically defined as two consecutive quarters of negative economic growth.
"Our expectation is that the extent of the economic weakness will be both modest and short-lived with positive growth returning early next year," BMO said.
In the fourth quarter, the bank said it expects inventories to be reduced by slightly more than in the third quarter, while net exports will likely put a greater drag on the economy as a result of the weakness in the United States.
Fourth quarter GDP, the bank said, will likely contract 1.4 per cent compared with the third quarter and remain flat from the same period a year earlier.
"In the face of indications that declining activity is intensifying, the Bank of Canada is likely to cut interest rates a further 25 basis points at the next policy announcement date Jan. 15," the bank said.
However, BMO also said — if upcoming data fail to show steeper declines — the bank could stand pat, holding its overnight rate at 2.25 per cent.
"The combination of a reviving U.S. economy and stimulative fiscal and monetary policy is expected to contribute to growth in Canada building through 2002 to around 3.5 per cent in the second quarter and over 4 per cent in the last two quarters of the year," according to the report.
"This will result in the fourth quarter-over-fourth quarter growth rate rising to 3.4 per cent next year."
The bank expects growth of 4.1 per cent in 2003.
As the economy improves, BMO said it expects the Bank of Canada to begin unwinding its current set of rate cuts starting in the summer of 2002, with rates climbing by 100 basis points by year's end.
In the United States, the bank said it expects the Fed to begin the tightening cycle in the summer of 2002. |
