Bank of Canada trims interest rate again

OTTAWA—The Bank of Canada trimmed its trend-setting interest rate by a quarter percentage point today, saying Canada needs the stimulus to ward off the headwinds from a global recession.
The reduction, following a surprise 50 basis point reduction two weeks ago, drops the overnight interest rate to 2.25 percent—a hair above the record low two percent level reached in 2004.

But the bank’s failure to chop by at least half-a-point left economists disappointed given the gloomy prospects for the Canadian economy.
“The entire statement was written in a remarkably dovish way as if to justify a 50- or 75-point cut and they fell short on execution,” said Scotia Capital economist Derek Holt.
“I think they should have stepped more firmly in front of the problems ahead and cut more aggressively,” he added.
With the economy sharply slowing, Canada’s central bank did hint it may have to cut further at the next scheduled announcement in December.
Bank governor Mark Carney characterized the headwinds hitting Canada from deteriorating global conditions as “profound,” and now projects the economy only will advance 0.6 percent this year and by the same amount in 2009.
That’s as close to a recession as possible without actually falling into one and sharply lower than the bank’s July forecast, which was for a one percent advance this year and relatively robust 2.3 percent growth in 2009.
The central bank now says Canada won’t emerge from the malaise until 2010, when it predicts growth will rebound to 3.4 percent.
“The weaker outlook for global demand will increase the drag on the Canadian economy coming from exports,” the bank stated.
“Lower commodity prices will also dampen the outlook, working through a deterioration in Canada’s terms of trade to moderate domestic demand growth,” it added.
As well, the bank said “tightening in Canadian credit conditions in recent weeks will restrain business and housing investment.”
The Canadian dollar was down 1.05 cents to 82.72 cents (U.S.) at mid-morning.