Bank of Canada cuts rates again

(March 2, 2004) The Bank of Canada lived up to expectations and cut its target for the overnight rate by 25 basis points, taking the trend-setting rate to 2.25%.

The bank justified the rate cut by pointing to the January Consumer Price Index, which came in “significantly below the 2 per cent inflation target.” This is the second rate cut the bank has served up this year, with the first coming January 20.

“While external demand has been slightly stronger and final domestic demand in Canada slightly weaker than expected, the Bank’s outlook remains on balance unchanged,” read a release from the Bank.

The big banks were quick to follow suit, chopping the same quarter per cent from their prime lending rates.

“It’s a sign that the economy, to this point, has been disappointing,” says Avery Shenfeld, senior economist at CIBC World Markets in Toronto. “The rate cut will be helpful to supporting growth, while the manufacturing sector deals with the challenges of a strong currency. It still leaves Canada trailing the U.S., which is benefiting from huge tax cuts.”

He points out that the Canadian dollar has been one of the poorest performers against the U.S. dollar in recent months, following the loonie’s dramatic rise in 2003.

“That’s a sign that markets have taken notice of the Bank of Canada’s discomfort with a further appreciation of the dollar,” he says. “I think by year-end, we’ll see the Canadian dollar slightly weaker still against the U.S. dollar — probably down in the 72 cent to 73 cent range.”

Aside from helping out the manufacturing sector, Shenfeld says lower interest rates will drive investors from the fixed income market toward equities with higher dividend yields. In particular, he sees the financial sector, utilities and the more heavily indebted telecom stocks benefiting.

There has been some speculation rates may head even lower before they start rise again and Shenfeld agrees.

“With inflation looking so tame, the Bank of Canada has the green light to cut interest rates again. So even on a mild disappointment on growth, we’ll see further rate cutting by the Bank of Canada,” says Shenfeld. “There would either have to be an upside surprise on inflation or the Canadian dollar weaken sharply [for rates to rise].”

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

(03/02/04)

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.