Bank of Canada cuts rates, outlook sours

Tue Dec 4, 2007 10:56am EST
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada cut its key overnight interest rate by one-quarter point to 4.25 percent on Tuesday, saying it expects U.S. subprime mortgage woes and financial market fallout to last longer than anticipated.

Sounding more pessimistic than it did in its last rate announcement in October, the bank said credit costs globally and in Canada have tightened and that it expects the slowing U.S. economy to suppress demand for Canadian exports. In October, the bank judged domestic borrowing costs to have tightened by 25 basis points.

The rate cut, the first since April 2004, went against expectations and prompted a sharp fall in the Canadian dollar.

But the move is likely to spur a collective sigh of relief from Canadian manufacturers and exporters, which have been calling for lower lending rates to help soften the pain caused by a strong currency.

"It certainly will impact a pretty broad set of customers. Businesses will be able to borrow more easily, exporters will encounter much more favorable conditions, both at the border and in their own borrowing, and it'll even give a spurt to the consumer," said Eric Lascelles, chief economics and rates strategist at TD Securities.

At least one bank wasted no time in following suit. Canadian Imperial Bank of Commerce immediately cut its prime lending rate to 6 percent from 6.25 percent.

A majority of Canada's primary securities dealers in a Reuters poll last week had expected the bank to keep rates steady, although most expected at least one rate cut by the end of January.

The bank's next move remains a mystery as it gave no hint of a bias for its January 22 decision, the last under Governor David Dodge, who will be replaced by Mark Carney on February 1. Nor did it suggest that it has embarked on a prolonged easing cycle.   Continued...

<p>The Bank of Canada cut its overnight interest rate by one-quarter point to 4.25 percent on Tuesday, saying it expected global financial market difficulties linked to U.S. subprime woes to persist longer than anticipated. REUTERS/Graphics</p>