Bank cuts lending rate

The Bank of Canada cut its benchmark lending rate to three per cent yesterday as the central bank moved to defend against a sharply slowing U.S. economy and its spillover into Canada.

The half-point cut in the bank's rate on overnight loans between commercial banks had been widely expected by economists as growth in Canada slows and the inflation rate remains benign.

The Bank of Canada said it now projects the Canadian economy will grow by 1.4 per cent this year. That's the slowest pace since 1992 and lower than the 1.8-per-cent growth forecast by the central bank in January. The bank revised down its outlook for 2009, cutting its forecast rate of growth to 2.4 per cent from 2.8 per cent, and predicted and 3.3 per cent in 2010.

The bank last eased lending rates -- also by a half point -- on March 4, at the time saying more action would likely be needed.

It said in a statement accompanying yesterday's rate decision that it is "now projecting a deeper and more protracted slowdown in the U.S. economy. This has direct consequences for the Canadian economic outlook, with declining exports projected to exert a significant drag on growth in 2008.

"In addition, tightening credit conditions and softening sentiment are expected to moderate business investment and consumer spending. Nevertheless, domestic demand is projected to remain strong, supported by firm commodity prices, high employment levels, and the effect of cumulative easing in monetary policy.

"In line with this outlook, some further monetary stimulus will likely be required to achieve the inflation target over the medium term," the bank said.

Douglas Porter, deputy chief economist for BMO Capital Markets, said in a research note that he expects the bank is now nearing the end of its current round of rate cuts.

(Source: Vancouver Province)