Canada rate cut offers hope to election-bound prime minister

Wed Jan 21, 2015 6:43pm EST
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By David Ljunggren

LONDON, Ontario Jan 21 (Reuters) - A stunning rate cut by the Bank of Canada may be the just the thing Canadian Prime Minister Stephen Harper needs to preserve a promised budget surplus as he heads into an election campaign dominated by plunging oil prices and faltering economy.

The central bank's move to cut overnight interest rates to 0.75 percent from 1 percent - the first rate move since September 2010 - could stimulate Canada's plodding economy and lower the government's debt costs just enough to preserve Harper's long-promised budget surplus.

"The symbolism of being able to campaign on a surplus is very important to the Conservatives, which is why they may go (to the polls) before October," said Duane Bratt, a politics professor at Mount Royal University in Calgary.

"There may be a sweet spot in the fiscal year where they can say they have a surplus that may not exist in the rest of the year."

The Conservative government, seeking a fourth straight term in this year's election, this week said it would delay its budget until April because of financial market volatility.

The rate cut by the central bank, which sets policy independent of the government, and its statement that lower oil prices would be "unambiguously negative," sent the Canadian dollar slumping and cast doubt on Conservative reassurances the economy was doing relatively well, but boosted odds of a federal budget surplus.

"This does improve the likelihood of the kind of outcome that the government was betting on in order to generate that budget balance," said Michael Gregory, senior economist at BMO Capital Markets.

Whether Canadians feel confident in the economy or fearful of a looming recession could decide the federal election. While the voting is set for Oct. 19, Harper has the freedom to change the date. His office has denied persistent speculation that he'll move the vote to April.   Continued...