Bank of Canada Cuts Rate to 2.25%, Signals More Moves

By Greg Quinn

Oct. 21 (Bloomberg) -- The Bank of Canada reduced its main interest rate by a quarter of a point, less than economists predicted, saying it will probably need to act again to fend off the effects of a credit crisis and global recession.

Governor Mark Carney and his five deputies trimmed the target rate for overnight loans between commercial banks to 2.25 percent, the lowest since October 2004. Seven of 24 economists surveyed by Bloomberg predicted the move, with 13 calling for a cut twice as deep and four expecting no change.

The credit squeeze spurred by the subprime mortgage meltdown is sapping demand for Canadian shipments of automobiles and lumber to the U.S., Canada's main export market. The global financial crisis also may crimp the domestic spending that's propped up Canada's economy, policy makers said. Today marked the first scheduled decision by a central bank within the Group of Seven major economies since a coordinated rate cut on Oct. 8.

``These actions provide timely and significant support to the Canadian economy,'' policy makers said in a statement from Ottawa, referring to their own rate cuts and the joint move. ``Some further monetary stimulus will likely be required.''

The Canadian dollar weakened 1.6 percent to C$1.2097 per U.S. dollar at 9:49 a.m. in Toronto from C$1.1909 yesterday.

``Surprisingly they didn't cut by more but the statement itself is awfully gloomy, leading me to believe there is an awful lot more to come,'' said Eric Lascelles, chief economics and rates strategist at TD Securities Inc. in Toronto.

Growth Forecast

The central bank may have been reluctant to ease by half a point after already doing so this month, he said.

Policy makers cut their forecast for economic growth this year to 0.6 percent from a July prediction of 1 percent. Next year's gross domestic product will also grow 0.6 percent, compared with a July forecast of 2.3 percent.

Canadian exporters will be hobbled by a U.S. recession, a world economy that ``appears to be heading into a mild recession,'' and lower prices for the country's exported commodities, the Bank of Canada said. Domestic spending will also be curbed by tougher lending conditions, the central bank said.

Policy makers didn't say that Canada's economy is headed for a recession, unlike economists at BMO Capital Markets, Bank of Nova Scotia, Credit Suisse Holdings Inc. and UBS AG.

Commodity Prices

Carney, 43, has room to cut rates because the economic slowdown is pushing commodity prices down from record highs set earlier this year. Those high prices drove inflation above the central bank's 2 percent target and boosted business profits and consumer incomes in provinces such as Alberta, home to the world's second-largest crude oil deposits.

Inflation peaked in the third quarter of this year and will fall below 1 percent in the middle of next year, the central bank said today. In July, policy makers said prices would accelerate to 4.1 percent between October and December.

The bank will provide a new detailed economic forecast paper in two days, and its next scheduled decision is Dec. 9.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.