January 25, 2008 / 12:16 AM / 10 years ago

Don't expect quick, deep rate cuts: Bank of Canada

OTTAWA (Reuters) - Bank of Canada Governor David Dodge steered markets away from the idea of sudden and large interest rate cuts on Thursday, saying the central bank sought to move “in a measured fashion.”

He did not rule out cutting rates by more than one-quarter percentage point at a time or reducing them in between the bank’s fixed announcement dates -- as the U.S. Federal Reserve did with its unexpected three-quarter-point cut on Tuesday.

But he said the Bank of Canada prefers to move at a steady pace with the medium term in mind, and that in any case the Canadian economy has bigger capacity pressures than the United States does, suggesting less of a need for deep Canadian cuts.

“Our situations really are quite different,” he told a regularly scheduled news conference, set two days after the bank cut its key overnight rate by a quarter point to 4 percent.

The bank has eight fixed policy announcement dates per year, the next one not being till March 4. Dodge repeated that further monetary stimulus is likely to be required in the near term.

Asked about the possibility of moving before March 4, he said: “I think moving in a measured fashion is certainly, most normally, the right way to operate and that’s how we’ve tried to operate.”

Pressed on whether it was possible to act between fixed dates, he pointed out that the bank had only done that once -- shortly after the September 11, 2001, attacks on the United States -- since introducing is new system of fixed dates in November 2000.

“It’s always conceivable but, as you well know, over the last decade we have changed rates outside the fixed dates only once,” said Dodge, who is retiring at the end of the month after seven years at the helm of the bank.

He used the “measured fashion” phrase again when asked about the possibility of a cut of a half point, or 50 basis points, on March 4.

“The general way we try to operate is to move in a measured fashion, keeping our eye on the medium term,” he said.

Dodge cited three differences with the United States, justifying steeper cuts there than in Canada:

- credit conditions for U.S. households had tightened a lot more than in Canada, especially for mortgages but also for all household debt;

- the United States did not start 2008 from a position of excess demand, whereas Canada did;

- Canada had greater pressures on the labor market and on capacity right through the economy at the end of 2007 and the indicators were still high. This was quite different from the United States, where residential construction activity was running at half the pace of a couple of years ago.

“The bank appears to be in no real urgency to crank up the pace of rate cuts (i.e., dimming the chance of a 50 basis point move), although they clearly stand ready to do more,” BMO Capital Markets deputy chief economist Doug Porter wrote to clients.

He said that given the central bank’s view that the economy would be perking up by the second quarter, the cutting cycle could be done by mid-year.

The view on small rate cuts was not unanimous, however. TD Securities predicted a half-point cut on March 4 and a further quarter point on April 22.

TD economics strategist Jacqui Douglas said the odds of a half-point cut have declined somewhat in light of Dodge’s remarks, but she pointed out that he would be replaced by Mark Carney on February 1.

“We still don’t know much about Mark Carney’s view on the economy,” she said.

Reporting by Louise Egan and Randall Palmer; Editing by Peter Galloway

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