Bank of Canada cuts lending rate to 2%

(April 13, 2004) Citing shifts in the global economy, the Bank of Canada today lowered its benchmark overnight lending rate by 25 basis points to 2%, a 44-year low. The move was widely expected by economists.

“The Canadian economy continues to adjust to developments in the global economy,” the central bank said in a statement accompanying today’s decision. “These include stronger world demand, higher commodity prices, the realignment of world currencies, including the Canadian dollar, and the intensified competition coming from emerging-market economies.”

Still, the bank says its outlook for economic growth and inflation are essentially unchanged and with today’s cut, “the risks to the outlook now appear balanced.”

The central bank has slashed rates three times so far this year, for a total of 75 basis points. However, most economists believe today’s move marks the end of the current easing cycle.

“Make no mistake about it, this cut is the last,” says TD’s Marc Levesque. “The bank’s statement left little doubt that, barring a full-fledged collapse of the Canadian economy — which is not in the cards — another ease in June is not in the offing.”

In fact, the central bank could shift gears and raise rates later this year, suggests BMO Nesbitt Burns economist Douglas Porter.

“In each of the past two years, the bank has reversed course in mid-stream — this economic backdrop suggests that 2004 could make it three in a row,” Porter says. “If you don’t agree with the bank’s current policy, don’t fret because, just like the weather, it could soon change.”

Levesque expects the bank to remain on hold for most of 2004, with rates nudging higher toward the end of the year.

In response to the central bank, the big chartered banks today lowered their prime lending rates by a quarter point to 3.75%, effective tomorrow. The Bank of Canada’s next interest rate announcement is set for June 8.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com