Bank of Canada Cuts Overnight Target to 1.5% from 2.25%

Daily Forex Fundamentals | Written by CurrencyThoughts | Dec 09 08 14:43 GMT |

A seventh rate reduction over the past 12 months was announced this morning. Such was the largest move so far and brought the cumulative decline to 300 basis points. Many analysts had expected a drop of 50 bps but bumped up those expectations after a series of out-sized rate cuts last week by other central banks. The six earlier Canadian cuts were reductions of 25 basis points each in December 2007, last January and October 21st and cuts of 50 bps last March, April and October 8th. Officials will probably cut rates further. The statement on October 8th had correctly predicted that "some further monetary stimulus will likely be required to achieve the 2.0% inflation target over the medium term." That wording has been modified but not in a way that implies a greater than even chance that easing has been completed. The new wording states: "the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent inflation target over the medium term." The new policy statement claims that Canada has entered a recession, something that was not apparent in October. The world economy has "deteriorated significantly," a global recession has been "deeper than previously anticipated," and financial markets "remain severely strained." Core inflation will have a lower path than assumed in October's semi-annual Monetary Policy Report, which had revised such downward to 1.7% year-on-year in 1H09 from 1.9%, 1.6% in 2H09 from 2.0%, and 1.9% in 2010 from 2.0%. The recession has some mitigating forces, foremost of which is the "depreciation of the Canadian dollar," which edged 0.4% lower after the central bank's announcement and is now trading 28.6% below its November 2007 peak. Officials are clearly unfazed by the currency's slide and, on the contrary, consider such to be appropriate. Also, money markets and credit conditions have responded positively to Canadian liquidity conditions. The 50-basis point premium of Canada's rate target to the target Fed funds rate compares to a 75-bp discount before the Fed began cutting its target in 3Q07. The Fed will be easing again on December 16th by at least 50 bps and very possibly more. The Bank of Canada's first fixed policy announcement date of 2009 will be on January 20th, the same day as the U.S. presidential succession. Canada's central bank will publish an update of its October Policy Report on January 22nd. At this stage, it is likely that the central bank cuts interest rates again next month. Larry Greenberg CurrencyThoughts