BoC trims rates, warns of U.S. recession

The Bank of Canada has cut its key overnight rate by 25 basis points to 2.25%. The cut itself comes as no surprise, but some had called for a 50 basis point cut.

The cut was carried through to the Bank rate as well, which now stands at 2.5%. The BoC left the door open to further rate cuts as well, saying “some further monetary policy stimulus will likely be required” to steer clear of inflation.

The Bank pointed to the global credit crisis as one of three key factors in its decision, saying that “severe strains” called for more accessible credit among financial institutions. Falling commodity prices have also reduced the risk of inflation in Canada.

The Bank also went on to say that the world was likely heading into a recession and that the U.S. was already there — an assertion that U.S. Federal Reserve chair Ben Bernanke has been careful to avoid making.

The Canadian economy should manage only 0.6% growth in real GDP in both 2008 and 2009, according to the Bank, before recovering in 2010 with anticipated growth of 3.4%. Inflation should remain under control, with core CPI below 2% until the end of 2010.

“Consistent with the G7 Plan of Action, major economies have announced extraordinary measures to stabilize their financial systems,” the Bank said in a statement. “These initiatives will be pivotal to resuming the flow of credit to support global economic growth. Canada’s economy and strong financial system will benefit directly from these actions.”

Falling global production will hurt the Canadian economy, as commodity prices recede from their recent highs. As income from foreign trade declines, the domestic economy will suffer.

The tight credit market is expected to constrict investment in both business and housing.

The Bank of Canada is not expected to revisit its interest rate decision before December 9, 2008.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(10/21/08)