Rising loonie sparks interest rate cut

(January 20, 2004) Citing the rapid appreciation of the Canadian dollar against its U.S. counterpart, the Bank of Canada today cut its key overnight lending rate by 25 basis points to 2.5%.

In a statement, the central bank said that although inflation remains below the target rate of 2% and the global economy is growing, the loonie’s ascent has “cut into the overall growth of demand for Canadian goods and services through weaker exports and increased imports.”

The rate cut — which narrows the spread between Canada and the U.S. to 1.5% — was widely anticipated by economists. CIBC’s Avery Shenfeld says market reaction to the bank’s move will likely be minimal, since the rate reduction was already priced in.

In response, the big banks started lowering their prime lending rates to 4.25% from 4.5%.

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