Bank of Canada Eases; Signals Likely to Stay on Hold June 8
Tuesday, April 13, 2004 2:20:00 PM
--Lowers Overnight Rate by 0.25% to 2.00% --Cut Made to Support Overall Canadian Economic Demand --Cut Intended to Shore Up Exports
By Courtney Tower
OTTAWA (MktNews) - The Bank of Canada Tuesday cut its key policy rate by a quarter of a percentage point, matching the lowest Canadian central bank rate since the 1960s.
The central bank lowered its target for the overnight rate by 0.25% for the third time this year, bringing it to the same level reached in January, 2002, the lowest level equivalent to what was then the bank rate in September 1960.
Although the Bank of Canada said its outlook for economic growth and inflation "remains essentially unchanged" from its outlook published in January, it said it was responding to developments in the global economy requiring "shifts in activity among sectors and ... A need for adjustments by many businesses." It was "supporting aggregate demand, with the goal of keeping the economy near its full potential and inflation on target."
These developments all have an impact on Canadian exports, which have tailed off somewhat in recent months. The development were cited as being stronger world demand, higher commodity prices, a realignment of world currencies against the U.S. dollar and a higher Canadian dollar, and "the new trading opportunities coming from emerging market economies."
These changes required adjustments that the central bank was meeting with the rate cut, which will trigger a cut in the prime rate that commercial banks charge their best customers to an expected 3.75%, again matching the lowest levels in four decades.
The central bank said its outlook was similar to January, when it forecast economic growth rates of about 3% in the first two quarters this year and slightly more in the second half. This was despite the fact that GDP declined by 0.1% in January, making it hard in the eyes of analysts to reach 3.0% for the quarter. There also has been a slight weakening in employment and in some other indicators, against strength in sectors, including a sizzling housing starts market.
"The economy is projected to return close to its production potential by the third quarter of 2005 and core inflation is projected to move back to the 2% target by the end of 2005," the central bank said.
For the economy, "the risks to the outlook now appear balanced," the bank said. That was taken to mean it was signaling no further rate cut on the next scheduled announcement date, June 8.
The Bank of Canada will elaborate on its views of the outlook for inflation and the economy in its Monetary Policy Report, scheduled for release on April 15.
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