Canada May Cut Rates Further: Analysts
Analysts said today's move was prompted largely by weak economic numbers and more such data could trigger another cut. "If we don't see any strength in the numbers coming up, then there's no reason to think they won't try to ease again.
There's no magic in the levels we're at right now," said Arve Bendiksrud, a fixed-income analyst with TD Securities Inc.
The Bank of Canada surprised many in the market this morning when it cut its key bank rate to 3.75 per cent, bringing the bank's target range for the overnight lending rate down to 3.25-3.75 per cent.
Canada's major banks responded by lowering their prime lending rates to 5.25 per cent from 5.5 per cent. Prime rates are now at their lowest point since February 1959.
It was the ninth rate cut by Canada's central bank this year and the eighth independent of an easing by the US Federal Reserve. The bank has now cut rates by 4.50 percentage points since May 1995. Its last rate cut was on October 2.
In a statement after the rate cut, the Bank of Canada said the easing was designed to keep overall monetary conditions from tightening, given the recent strengthening in the Canadian dollar. A stronger dollar tightens monetary
conditions by making the country's exports less attractive.
But recent economic data likely had more to do with the cut than the dollar's recent appreciation. "That's what the Bank of Canada is worried about here. The forward momentum that appeared to be taking hold through the summer has proved fleeting," said Michael Gregory, an economist and strategist with Lehman Brothers.
Statistics Canada said on Friday the unemployment rate in September rose to 9.9 per cent from 9.4 per cent in August. The agency also said employment fell by 47,000.
The surprising employment data were followed by a report today that showed manufacturers' shipments fell 0.7 per cent in August from July. Shipments were expected to rise 0.6 per cent.
"Most people at the moment seem to think the Bank eased because we had a very weak unemployment report and then a weak manufacturing report this morning, rather than to compensate specifically for strength in the currency," said TD's Bendiksrud.
Aggravating concern about the economy is the expected impact of a strike at the Canadian arm of General Motors Corp, which began on October 2.
"It's not so much the direct impact of the strike. It just so happens the negative impact on the economy of the strike is coming after a couple months of pretty dismal news anyway. Therefore, the bank really has no choice here," said Gregory. In contrast to the past several rounds of rate cuts, today's move was a "flat-out" ease and not just a rebalancing of monetary conditions.