Oct. 21 (Bloomberg) (By Greg Quinn and Theophilos Argitis) -- The Bank of Canada reduced its main interest rate by a quarter of a point, less than economists predicted, saying it will probably need to act again to fend off the effects of a credit crisis and global recession.
Governor Mark Carney and his five deputies trimmed the target rate for overnight loans between commercial banks to 2.25 percent, the lowest since October 2004. Canada's six biggest banks passed the relief on to customers by lowering their prime rates to 4 percent. Canada's dollar fell to the lowest in more than three years as traders bet on more reductions in the central bank's benchmark.
``Surprisingly they didn't cut by more, but the statement itself is awfully gloomy, leading me to believe there is an awful lot more to come,'' said Eric Lascelles, chief economics and rates strategist at TD Securities Inc. in Toronto.
The credit squeeze spurred by the subprime mortgage meltdown is sapping demand for Canadian shipments of automobiles and lumber to the U.S., Canada's main export market. The global financial crisis also may crimp the domestic spending that's propped up Canada's economy, policy makers said. Today marked the first scheduled decision by a central bank within the Group of Seven major economies since a coordinated rate cut on Oct. 8.
Seven of 24 economists surveyed by Bloomberg predicted today's move, with 13 calling for a cut twice as deep and four expecting no change. The central bank may have been reluctant to ease by half a point after already doing so this month, Lascelles said.
`Timely' Support
``These actions provide timely and significant support to the Canadian economy,'' policy makers said in a statement from Ottawa, referring to their own rate cuts and the joint move. ``Some further monetary stimulus will likely be required.''
The Canadian dollar weakened by as much as 2.5 percent to C$1.2208 per U.S. dollar, the lowest since August 2005, from C$1.1910 yesterday. It traded at C$1.2140 at 5 p.m. in Toronto. The drop from a record 90.58 Canadian cents per U.S. dollar set last Nov. 7 will help exporters, the bank said.
Policy makers cut their forecast for economic growth this year to 0.6 percent from a July prediction of 1 percent. Next year's gross domestic product will also grow 0.6 percent, compared with a July forecast of 2.3 percent.
Canadian exporters will be hobbled by a U.S. recession, a world economy that ``appears to be heading into a mild recession,'' and lower prices for the country's exported commodities, the Bank of Canada said. Domestic spending will also be curbed by tougher lending conditions, the bank said.
`Not Done'
Policy makers didn't say Canada's economy is headed for a recession, unlike assessments by BMO Capital Markets, Bank of Nova Scotia, Credit Suisse Holdings Inc. and UBS AG.
``They firmly signaled they are not done,'' said Derek Holt, an economist at Scotia Capital in Toronto, adding the rate will be lowered to 1.75 percent at the next meeting. ``You could have taken that statement today and easily changed the headline to have a 50- or 75-basis point cut.''
Canada's key rate hasn't been below 2 percent since 1960, and its record low was 1.12 percent in 1958, a time when it was based on treasury yields rather than actions by policy makers.
Canadian banks, rated the soundest in the world this month by the World Economic Forum, are still reluctant to lend after the worst financial malaise since the Great Depression toppled institutions such as Lehman Brothers Holdings Inc. in the U.S. and Fortis in Europe.
Prime Rates
The biggest commercial banks hesitated in cutting their prime rates after the Oct. 8 move, the first time that's happened since 1997, with four matching the full 50-basis point reduction only after the government created a program to purchase up to C$25 billion of their mortgages.
Prime Minister Stephen Harper, who won re-election on Oct. 14 by arguing he was a better economic manager than his rivals, has said he'll meet with provincial leaders in the coming months to discuss the economy. Harper last week also backed French President Nicolas Sarkozy's call for international meetings on restoring confidence in financial markets.
``We're looking at a much longer downturn in the American economy than anyone was thinking a year ago,'' British Columbia Premier Gordon Campbell said after a meeting of provincial leaders in Montreal yesterday on the economy. British Columbia is Canada's top lumber-exporting province.
`Challenging' Conditions
Canfor Paper Corp., Canada's second-largest lumber producer by market value, said Oct. 8 it will close a plywood plant in Fort Nelson, British Columbia. The 290-worker factory was shut because of ``unprecedented and challenging market conditions,'' Chief Executive Officer Jim Shepard said in a statement.
Carney, 43, has room to cut rates further because the economic slowdown is pushing commodity prices down from record highs set earlier this year. Those higher prices drove inflation above the central bank's 2 percent target and boosted business profits and consumer incomes in provinces such as British Columbia and Alberta, which is home to the world's second-largest crude oil deposits.
Inflation peaked in the third quarter of this year and will fall below 1 percent in the middle of next year, the central bank said today. In July, policy makers said prices would accelerate to 4.1 percent between October and December.
The bank will provide a new detailed economic forecast paper in two days, and its next scheduled decision is Dec. 9.
To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net; Theophilos Argitis in Ottawa at targitis@bloomberg.net.
Last Updated: October 21, 2008 17:07 EDT
