Thursday, October 02, 2008

Canada Likely Bound for Rate Cuts

Canada is safe from recession, even if the U.S. Congress rejects a bailout package and global credit dries up further, but the economy may take enough of a beating to force the Bank of Canada to cut interest rates.

Credit is harder to come by for Canadian businesses, curtailing their investments. U.S. consumer purchases of made-in-Canada goods is wilting and commodity prices are slamming into reverse from record highs.

That toxic mix has sent economists back to their models to churn out lower growth forecasts for both 2008 and 2009, raising the likelihood that the central bank will have to consider easing borrowing conditions.

If the U.S. government can't put something through, that clearly increases the risk to Canada through the end of the year and into next year.

The export sector, heavy reliant on the U.S. market, is getting clobbered and 70,000 factory jobs have been lost in the past year. But commodity prices are still higher than a year ago, padding household and corporate income.

At this point we don't really see negative growth for Canada, even in the worst-case scenario. We still look at them as being able to eke out a little bit of growth because they've been so resilient thus far.

Last month after holding rates steady at 3%, the Bank of Canada flagged a worsening U.S. outlook as one key risk that could prompt it to change its mind on rates. In a Sept. 25 speech Governor Mark Carney said this risk had become "more probable."
Markets on Thursday had priced in a 96% probability of a rate cut on Oct. 21 due to the financial market meltdown, up from 51% on Sept. 23.
Some economists are gradually coming around to that view as well.

Even if the rescue package is passed, I'm still assuming that there is about a 60 % chance the bank will cut in October.


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