Canadians unlikely to see big rate cuts
By: Eric Beauchesne
Updated: March 28 at 02:00 AM CDT
OTTAWA -- Canadians don\'t need and won\'t likely get the hefty dose of interest-rate relief that markets still expect, or that Americans will get, domestic financial institutions said Thursday.
One, CIBC World Markets, joined the growing number of forecasters in declaring the U.S. is in a recession and that as a result will require further deep rate cuts.
However, it said the Bank of Canada will need to see more evidence of economic weakness here before going ahead with an expected further half-point cut next month.
The other, BMO Capital Markets, which had already declared the U.S. economy in recession, also questioned whether the interest-rate cuts here that markets expect are even appropriate for Canada\'s still strong domestic economy.
The analysis, and the declaration that the U.S. is in recession, were issued despite better than expected economic reports Thursday that prompted an international economic think tank to counter that the risk of a U.S. recession has eased.
The buildup of inventories in the U.S. in the final quarter of last year was less than initially reported and spending on services higher, even though overall growth was unchanged at an anemic 0.6 per cent annual pace, while jobless claims eased last week, Action Economics noted.
\"Both of today\'s U.S. reports have chipped away at recession risk, though the market is unlikely to alter its laser beam focus on a weak U.S. economy,\" said Action Economics.
\"The component mix revealed a sharp downward revision in the already lean inventory figures... leaving little room for further weakness, alongside a sizable boost to service consumption,\" the think tank said. \"In addition, claims again failed to show the upward drift that would be expected in a recession.\"
However, CIBC World Markets disagreed.
\"With the preponderance of fundamental indicators rolling in worse than expected, the question is no longer whether the U.S. economy is in recession, but how long it will last,\" it said, adding that as a result U.S. rate cuts will be deeper than it had anticipated.
The good news is that the recession will be relatively mild and a recovery will start this summer thanks to the aggressive interest rate cuts by the Federal Reserve and the U.S. government\'s economic stimulus package, it said.
\"But still sturdy Canadian domestic demand will see (Bank of Canada governor Mark) Carney less prone to dramatics than his U.S. counterpart,\" it said. \"We\'ll have to see some weaker job figures for the next move to be the (half a percentage point) dose we currently expect.\"
CIBC has projected the Bank of Canada will cut its trend-setting rate a further three quarters of a percentage point to a low of 2.75 per cent, while the Federal Reserve cuts its already lower rate by a further full point to 1.25 per cent.
BMO Capital Markets also suggested current rate expectations may not be warranted. \"There appears to be a growing divergence between Canadian interest rates and the economic realities on the ground,\" it said in the analysis by BMO economist Douglas Porter.
There is no convincing evidence that the credit crunch is weakening the Canadian economy with the labour market remaining tight, and still healthy levels of consumer spending and confidence, he said. Further, core inflation is more likely to start moving higher than lower as the dampening impact on inflation of the strong dollar may have run its course.
\"Of course, a deep U.S. recession would drive a deeper stake into exports and also hit commodity prices, pulling Canada down as well,\" Porter said. \"While certainly a possibility, the odds are probably lower on that scenario than debt markets are now pricing in, especially in light of the wave of stimulus unleashed by U.S. policymakers.\"
-- Canwest News Service |
