Dealers brace for 50-pt rate cut next week

By Frank Pingue

TORONTO (Reuters) - Most of Canada's primary securities dealers predicted on Friday that the Bank of Canada will cut interest rates by 50 basis points next week given the slowdown in the U.S. economy.

Eight of Canada's 12 dealers, surveyed by Reuters, forecast Canada's central bank will cut its key overnight rate by 50 basis points to 3.50 percent on March 4. Four of the dealers expect a 25-basis-point cut.

That is identical to a Reuters poll conducted on February 19.

Canadian data has painted the picture of a relatively healthy economy, but nagging concerns about a slowdown in the United States spilling into Canada have made the size of the bank's rate cut next week a tough once to call.

"I think it's an exceptionally close call and I could easily see the more aggressive move," said Doug Porter, deputy chief economist at BMO Capital Markets, who expects the bank to cut rates by 25 basis points. "There's just this renewed concern about the credit markets that we are seeing."

Those concerns were heightened earlier this week when U.S. Federal Reserve Chairman Ben Bernanke flagged further rate cuts during his congressional testimony.

Bernanke admitted that price pressures could make it harder for the Fed to ensure the U.S. economy keeps growing and that some small U.S. banks could go under from the financial stress of housing market woes.

"Basically we are looking south," said John Clinkard, chief economist at Deutsche Bank who is calling for a half-percentage point rate cut next week. "Bernanke's recent comments were very dovish and has suggested to us that there is more risk to the United States."