May 7, 2008
Economic Snapshot, May 7, 2008
Bank of Canada adopts "wait-and-see" approach to further interest rate cuts
In its most recent policy interest rate announcement on April 22, 2008, the Bank of Canada (BOC) cut its benchmark overnight rate by 50 basis points, to 3.00%.
This move marked the fourth consecutive time that the BOC has cut its key policy interest rate since December 2007. The rate is now at its lowest level since September 2005.
In justifying this latest cut, the Bank of Canada indicated that, while the Canadian economy has been working above its operating capacity, the bank is “now projecting a deeper and more protracted slowdown in the U.S. economy.”
The BOC expects that this weaker U.S. pattern of growth will exert a significant drag on Canada’s growth in 2008 and, together with tightening credit conditions, cause a slowdown in business investment and consumer spending.
As far as further interest rate cuts are concerned, the BOC has left the door open. Despite the fact that the economy is operating flat out, the core inflation rate is currently at 1.3%, a seven-and-a-half year low. The Bank of Canada has a target inflation rate of 2.0%.
In the announcement, the Bank of Canada also stated that it is likely further stimulus will be required. However, it also indicated that the timing of this stimulus will depend on the health of the global economy and on domestic demand in Canada.
Although most analysts expect that the BOC will cut rates by another 25 basis points in June, 2008, it is quite possible that the Bank will hold off on further easing until it can gauge the impact of the rate cuts made between December 2007 and April 2008.
This possibility is heightened by the recent comments by the U.S. Federal Reserve that it also plans to adopt a "wait-and-see" approach to further interest rate cuts.
John Clinkard has over 30 years experience as an Economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Key Central Bank Lending Rates - Canada vs the United States
Data sources: U.S. Federal Reserve Board and Bank of Canada. Chart: Reed Construction Data - CanaData.
