Bank of Canada slashes rates on gloomy U.S. view

Tue Mar 4, 2008 4:31pm EST
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By Louise Egan

OTTAWA (Reuters) - In its first interest rate decision under new Governor Mark Carney, the Bank of Canada sounded a gloomy warning on the U.S. economy on Tuesday by slashing its key rate by a half point, the biggest cut since 2001, and signaling more to come.

The bank reduced its overnight lending rate to 3.50 percent, bringing Canada's cumulative rate cuts since December to one percentage point and narrowing the gap with the U.S. Federal Reserve's 3-percent rate.

In a sign that Carney is more troubled by the spillover effects of the U.S. housing crisis than his predecessor David Dodge, the bank said its outlook for the U.S. economy had worsened since January, outweighing any potential inflationary pressure from strong domestic spending.

"There are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected in January," the bank said in a statement.

"These developments suggest that important downside risks to Canada's economic outlook that were identified in the MPRU (January 24 Monetary Policy Report Update) are materializing and, in some respects, intensifying."

Carney assumed the job of central bank chief on February 1.

"It's a pretty dovish statement and I think Carney has clearly put his mark on this one and he is somewhat more dovish than Dodge was in my view," said Eric Lascelles, chief economics and rates strategist at TD Securities.

The bank's statement repeated a line from its January 22 rate cut that said "further monetary stimulus is likely required in the near term."   Continued...

<p>The Governor of the Bank of Canada, Mark Carney, speaks to the British Columbia Chamber of Commerce and the Business Council for British Columbia in Vancouver British Columbia, February 18, 2008. REUTERS/Lyle Stafford</p>