Markets expect another rate cut Tuesday
The Bank of Canada is widely expected to deliver another interest rate cut Tuesday morning amid signs that the economy is cooling.
Most analysts say the central bank will drop its key overnight lending rate by a quarter of a percentage point to 2.75 per cent and then put its recent rate-slashing campaign on hold.
A survey of 12 primary dealers by Reuters shows all are calling for a quarter-point rate cut, followed by a pause.
"We expect the bank to send a signal that they believe they are likely done cutting rates (but not completely slamming on the door on possible further action)," said BMO Capital Markets economist Doug Porter.
TD economics strategist Jacqui Douglas also sees the central bank moving to the sidelines following a quarter-point cut on Tuesday. But she sees the bank trimming rates again later this year.
"With extremely weak demand from our biggest trading partner, we think that shrinking exports will keep the Canadian economy at a below-potential growth rate for some time, and that before the end of the year, the Bank of Canada will see that the recovery it had hoped for is not occurring," she said.
Others think the central bank won't resume its rate-cutting until next year. "We expect a quarter-point cut from the Bank of Canada on June 10th, followed by a pause … as the [bank] waits to evaluate the post-rebate U.S. economy, and then a return to easing with a further half-point cut in Q1 2009," said Scotiabank economist Derek Holt.
Mixed signalsObservers noted that the Bank of Canada has some mixed signals to wrestle with as it ponders its interest rate decision.
On the one hand, there are definite signs that the economy is slowing down. The country's GDP unexpectedly contracted by 0.3 per cent annualized in the first quarter. Housing is cooling, last month's job-creation figures were the lowest this year and a couple of recent surveys show consumer confidence in Canada has fallen to a six-year low.
On the other hand, inflation pressures are building, with oil topping at a record $139 US a barrel last week. Food prices also took a big jump in April.
The Bank of Canada has already slashed its key lending rate by 1.5 percentage points since early December. At its last policy meeting in April, the central bank cut its overnight rate by half a percentage point.
The C.D. Howe's monetary policy council recommended the Bank of Canada make no change in its overnight rate. But the 11 members were sharply divided. Three of the 11 called for a cut of a quarter of a percentage point, five recommended no change, and three called for rate increases.
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