Carney May Cut Canada Interest Rate to Record 0.5% as GDP Drops

By Greg Quinn

March 3 (Bloomberg) -- Canada’s central bank will probably cut its key lending rate to its lowest level ever today to counter record job losses and an economy shrinking at the fastest pace in almost two decades.

Bank of Canada Governor Mark Carney will probably cut the target rate on overnight loans between commercial banks to 0.5 percent from 1 percent today at 9 a.m. New York time in Ottawa, according to 15 of 23 economists surveyed by Bloomberg News.

Canada is being pulled into a recession as global demand for its automobiles and lumber plunges along with the prices for the commodities it produces. The world’s eighth-largest economy shrank at a 3.4 percent annualized pace in the fourth quarter, Statistics Canada reported yesterday, the most since 1991.

“Weakness in global markets and a deep downturn in the global and Canadian economies tips the balance toward further rate cuts,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. “Events will force their hand again.”

Canada’s decision comes two days before the European Central Bank and the Bank of England are also expected to cut their key interest rates to new lows. ECB President Jean-Claude Trichet signaled policy makers may pare their benchmark rate to a record low of 1.5 percent March 5 as a recession in the euro area deepens. The Bank of England cut to 1 percent last month, the lowest since it was founded in 1694, and economists expect the rate to fall to 0.5 percent this week.

The U.S. Federal Reserve reduced its benchmark to a range of between zero and 0.25 percent on Dec. 16.

‘Further Stimulus’

Carney has cut the central bank’s policy rate from 4 percent since taking over in February 2008, and on Jan. 20 reduced it below the old record of 1.12 percent set in 1958.

“We will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required,” Carney told a parliamentary committee Feb. 10. The phrase echoes what the central bank said on Jan. 20 when the main rate was cut half a point to 1 percent.

“Those who have an expectation that things are going to recover dramatically and quickly as we come out of this, that’s less and less likely all the time,” Royal Bank of Canada Chief Executive Officer Gordon Nixon told reporters Feb. 26.

Job Losses

Statistics Canada reported a record job loss of 129,000 in January, and the agency’s leading economic indicator fell the most since 1982 in January. Bankruptcies in December also jumped 47 percent from a year earlier. The Bank of Canada said Jan. 24 that output will shrink at a 4.8 percent pace in the first quarter and 1.2 percent in 2009.

Xstrata Plc, the largest exporter of coal used by power plants, said Feb. 9 it plans to eliminate 686 jobs as it shuts two Canadian nickel mines following a slump in demand and stops developing a new property.

Industry Minister Tony Clement said Feb. 20 that his government’s contribution to a General Motors Corp. aid package may total between C$6 billion ($4.7 billion) and C$7 billion. Canada wants to keep its 20 percent share of North American production as U.S.-based automakers grapple with falling sales.

“While 2008 was a difficult year for the industry, 2009 is expected to be worse,” Magna International Inc. Co-Chief Executive Officer Donald Walker said on a Feb. 24 conference call. Magna, based in Aurora, Ontario, is North America’s largest auto parts supplier.

Canada’s key rate will remain at 0.50 percent through the first quarter of next year, according to economists surveyed by Bloomberg News. Rates can stay low because inflation isn’t a big risk, said Don Drummond, chief economist at Toronto-Dominion Bank. The Bank of Canada is predicting 3.8 percent economic growth next year, still not enough to bring inflation to its 2 percent target until the first half of 2011.

“Suppose that we do recover to 3.8 percent next year, are we going to have an inflation problem? I don’t think so,” Drummond said. “Anybody, including the Bank of Canada, would be pretty darn pessimistic about what’s been happening lately.”

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