Bank of Canada opts for mild rate cut despite Fed

Tue Jan 22, 2008 11:18am EST
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada held back in the face of an aggressive interest rate cut by the U.S. Federal Reserve on Tuesday, shaving just a quarter-point off its own key rate, but it signaled more cuts to come as U.S. recession worries spiral.

In a regularly scheduled announcement, the central bank lowered its overnight lending rate to 4 percent from 4.25 percent. It was the bank's second straight quarter-point cut as it seeks to protect the Canadian economy from the severe slowdown or even recession that faces Canada's top trading partner.

The move came shortly after the Fed slashed its federal funds rate by 75 basis points to 3.5 percent. It disappointed a growing number of market players who are calling for a bolder rate cut by Canada to match the Fed.

"The Bank of Canada is clearly stubborn, not wanting to cut by more than 25 basis points and I think the market is quite disappointed," said Eric Lascelles, chief economics and rates strategist at TD Securities.

Ted Carmichael, chief economist at JP Morgan Canada, said the bank "did what was expected a week ago and hasn't reacted whatsoever to developments in financial markets in the past week."

The Bank of Canada, which prepared its rate announcement on Monday, opted not to alter its decision at the last minute in reaction to the Fed move.

While warning that Canada's exports will be hit by the U.S. slowdown, the bank emphasized that high commodity prices will continue to help keep Canada's economy buoyant.

"Despite tighter credit conditions, domestic demand is projected to remain strong," the bank said in its statement.   Continued...

<p>Bank of Canada Governor David Dodge leaves his office for a news conference in Ottawa October 18, 2007. The Bank of Canada cut its key overnight interest rate by a quarter-point to 4 percent on Tuesday, as expected, and said further cuts are likely to be needed to protect the economy from the worsening U.S. housing crisis. REUTERS/Chris Wattie</p>