Gloomy data adds weight to rate-cut prospect

Wed Oct 22, 2008 1:59pm EDT
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By David Ljunggren

OTTAWA (Reuters) - Canadian retail sales dropped for the first time in six months in August and the composite leading indicator fell, giving weight to analysts' predictions that the Bank of Canada will cut interest rates again this year to try to stimulate an economy increasingly hit by the global financial crisis.

Statistics Canada said on Wednesday that retail sales slipped by 0.3 percent from July due to lower sales in the automotive sector. Market analysts had, on average, forecast a 0.2 percent fall in August.

"Canadian consumers clearly lost their resilience even before the peak credit crunch hit. This does not bode well for the traditional Christmas retail season that we're now entering," said Derek Holt and Karen Cordes of Scotia Capital.

"This provides further support to our view that the Bank of Canada needs to cut rates significantly further."

The central bank cut its key interest rate on Tuesday by a quarter point to 2.25 percent, and said it would likely have to ease credit further. The next scheduled rate announcement date is on December 9.

The souring economy is also set to dominate domestic politics. During the campaign leading up to last Tuesday's election, Prime Minister Stephen Harper ruled out running a deficit at any point in the next four years.

Since retaining power, however, Harper has declined to say whether he can keep the government's budget in surplus next year. Going into the red is widely seen as politically unwise in Canada, which spent several painful years eliminating big deficits in the 1990s.

The August drop in retail sales was the first since a 0.3 percent decline in February. The automotive sector dropped by 1.8 percent, largely due to a 3.7 percent drop in sales at gasoline stations.   Continued...