Expect further cuts in interest rates

The focus this week will be on how far the Bank of Canada is willing to cut interest rates to cushion the Canadian economy from the slump in the U.S., the strong Canadian dollar and the global and domestic credit crunch.

A growing proportion of economists suspect that with last month's inflation rate falling further than expected, and with the threats from the slump in the U.S. and the credit crunch, the central bank will cut its trendsetting target rate a further half-point Tuesday to three per cent.

And Scotiabank economists also expect the central bank, in its statement announcing a half-point rate reduction, will indicate that it's leaning toward making further reductions

Core inflation is just 1.3 per cent, which gives the bank the inflation wiggle room to cut interest rates further, and the Canadian dollar remaining strong will help limit price gains, Scotiabank said.

Also, bank governor Mark Carney seems to be well aware of the threat to the economy posed by a decline in the availability and increase in price of credit, it added.

However, some analysts, such as those at UBS, suspect the central bank will move more cautiously, trimming its key rate by only a quarter point to 3.25 per cent, but leaving the door open for more aggressive cuts later to bring the rate down to 2.75 per cent by summer.

While the central bank will reveal the thinking behind whatever decision it makes in a brief accompanying statement and may give a hint of what may come next, it will present a more detailed analysis of the economic financial situation and outlook in its semi-annual monetary policy report Thursday and at a following news conference by Carney.

"His main concern on the outlook seems to be the strong link between the Canadian and U.S. economies, as weakness south of the border has a direct impact on Canada, particularly the export-oriented sectors," noted Dina Cover, an economist at TD Bank, which expects a half-a-percentage-point cut Tuesday and suspects even more may be needed later.

"Carney [at this month's G7 meeting] expressed concern about the financial turmoil, which has yet to abate despite numerous efforts by central banks to boost liquidity and improve credit spreads."

Some analysts also expect the Bank of Canada may again cut its projections for economic growth this year.

The next hint of how much rate relief Canadians need comes the day after the bank's decision with the release of monthly retail sales figures for February by Statistics Canada.

"Canadian consumers likely cooled their jets in February, although spending trends remain impressive, said BMO Capital Markets economist Douglas Porter. "Retail sales likely struggled to post any growth in the month after the blowout 1.5-per-cent January jump."

The economic reports out of the U.S. this coming week, meanwhile, should do nothing to ease Carney's concerns about weakness there spilling over into Canada.

Reports on sales of existing homes on Tuesday and on new home sales Thursday will likely suggest the U.S. housing recession is deepening, Desjardins Group suggested in its look at the week ahead. Not surprisingly then, and also in light of the recent jump in oil and gasoline prices, it also expects a report Friday to show U.S. consumer confidence, already at a quarter-century low, has slipped further.

But the bad news won't stop there, as it anticipates that a report Thursday will show a decline in durable-goods orders, which could point to a decline in business capital investment.

(prepared by Eric Beauchesne/Vancouver Sun)