TORONTO (Reuters) - The Bank of Canada will cut rates by at least 50 basis points next week to combat a global slowdown the central bank said has pushed the country into recession, a Reuters poll released on Thursday showed.
The central bank has already cut its key overnight rate by three full percentage points since December 2007. But with no clear evidence of when the global financial crisis will end, dealers said more cuts are needed to support the domestic economy.
“The speed of deterioration in the U.S. economy is probably faster than the bank judged back in December and so that would suggest that the spillover effects into Canada will be more profound,” said Derek Holt, an economist at Scotia Capital.
Eleven of the 12 dealers surveyed by Reuters forecast the central bank will cut the overnight rate by 50 basis points to a fresh 50-year low of 1.00 percent on January 20. One dealer, Desjardins Securities, expects a 75 basis point cut to 0.75 percent.
“With the economic data coming in pretty bad early in the first quarter I think the Bank of Canada will maybe have some justification in lowering rates a lot more than what is expected by the market,” said Martin Lefebvre, senior economist at Desjardins Securities in Montreal.
Global central banks have cut rates aggressively over the past year in response to the greatest financial crisis since the Great Depression.
The European Central Bank cut its benchmark interest rate by half a percentage point on Thursday, its fourth cut in as many months. In December the Federal Reserve lowered its benchmark rate to a range of zero to 0.25 percent.
Just last week Bank of Canada Deputy Governor Pierre Duguay hinted that the bank would continue to cut interest rates this year, but shied away from giving any indication of how deep any future cuts would be.
The Bank of Canada said late last year the domestic economy, whose performance relies heavily on exports, has entered a recession given the deeper-than-expected global slowdown and severely strained financial markets.
The comments from Duguay came before domestic data on January 9 showed the economy shed more jobs than expected in December while the jobless rate hit a two-year high.
And a report on Tuesday showed Canada’s trade surplus fell to an 11-year low in November as oil prices tumbled and demand for Canadian goods declined along with the U.S. economy.
Another blow being absorbed by the Canadian economy is the massive turnaround in commodity prices, notably the more than $100 plummet in oil prices from the record peak of above $147 in July.
“The speed with which commodities are coming off and the extent to which that’s going to further drag headline inflation down is, I think, posing some downside even to the bank’s ... inflation outlook,” added Scotia Capital’s Holt.
For the central bank’s policy announcement date on March 3, there is little consensus among the primary dealers on what the bank will do, with forecasts ranging from no move to a cut of up to 50 basis points.
Six of the dealers expect the Bank of Canada to leave rates steady in March, four are calling for a 50 basis point cut and two expect a 25 basis point cut.
When the bank delivers its rate decision in April, nine dealers expect no change in rates, two expect a cut of 25 basis points and one sees a 50-point cut.
There is no other key data due ahead of the scheduled Bank of Canada rate announcement next week. Bank of Canada Governor Mark Carney will make a presentation on the global economy on Friday to a closed-door meeting of Prime Minister Stephen Harper and the country’s provincial premiers.
Editing by Jeffrey Hodgson