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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (6316)	1/28/2004 8:59:34 AM
From: mishedlo	Respond to of 110194

from Wayne (a canadian) on my board. Not sure the source The Bank of Canada chose not to cut interest rates months ago, when many urged it to and now the bank seems determined to make up for lost time. Will it be too little, too late? This week our central bank snipped the overnight rate to 2.50 per cent from 2.75 per cent, as expected. Our currency, after all, has climbed over 20 per cent over the past year, and it has torn a strip from our exports. A cut to interest rates to give things a jumpstart came as little surprise. The shocker though, is how glumly our central bank now seems to view the Canadian economy. In the Bank of Canada's Monetary Policy Update, a report released two days after the rate decision, the bank slashed its forecast for the Canadian economy to 2.75 per cent from 3.25. That's a significant revision, particularly from a source that up till now seemed determined to look at the bright side. "In Canada, economic growth in the period ahead will need to come primarily from private domestic demand, supported by monetary stimulus and by strong business confidence” the bank said in the report. Translation: the U.S. economy is not driving our economy the way it should. The U.S., in fact, is one of our major problems. By running two significant deficits—on its current account and government budget—it's making the U.S. dollar look like a significant risk. In turn, that has meant the Canadian dollar has been bought up—and our economic problems have multiplied. The Bank of Canada also made note of the “output gap,” one of its favoured measures of Canadian economic health. In its models, our central bank looks at the difference between how quickly our economy is growing and how quickly it could grow if we were going full blast. With so much drag on our economy, the bank does not expect that gap to close until the end of next year. Time for more rate cuts. Or, as they say in the language of central bankers, “monetary stimulus.” Canadian bonds rallied as soon as the report was released. Another 25 basis-point rate cut now looks like a done deal for March 2, and more slashing is a possibility after that. That's good news for anybody thinking of renewing their mortgage, anyway (mortgage rates are tied to bond yields). As for the Canadian dollar, our central bank has now done about all it can do to drive it to a level that may be more acceptable to Canada's exporters. It may not help too much: with everyone rushing to get U.S. dollars out of their portfolios, the loonie might be hard to ground for long. Still, by making it clear our benchmark rates are falling, investors could look elsewhere for currencies to hold. The central banks in Australia and England, for example, are looking to raise rates soon, which makes the Aussie dollar and the British pound better bets than our dollar. As for betting on the Canadian economy, don't count it out yet. If the U.S. surges back again, then the Bank of Canada's forecast of 2.75 per cent growth may turn out to be too cautious. For the moment though, the outlook is just a tiny bit grim. The Bank of Canada may not want to hear it, but the consensus is that it would have been better off cutting rates six months ago, when it might have made more of a difference.