Interest rate cut imminent

The Bank of Canada will have to cut interest rates further than expected to cushion the economy against a deepening slump in its key export market and to rein in a currency that soared further above parity Tuesday, forecasters predict.

Reinforcing that view were reports that Canadian wholesalers have suffered their second consecutive quarterly decline in sales, and that an index of U.S. economic activity sunk deeper below recessionary levels at the start of the second quarter.

A modest 0.6 per cent gain in wholesale sales in March reported by Statistics Canada, which was a little stronger than expected, wasn't enough to prevent the second straight quarterly decline in sales.

"For the first quarter this means that GDP is likely going to come in close to flat, missing the Bank of Canada's forecast of a one per cent annualized gain, and giving further support to our call for more rate cuts from the Bank of Canada than the markets are expecting," said TD Securities economist Jacqui Douglas.

Further, adding to evidence of the economic damage of the strong Canadian dollar was a report that foreign visits here in March hit their lowest level on records going back to 1972, while Canadians, armed with their strong currency took the most number of trips to the U.S. in a decade and the most ever to other countries.

"Travel to Canada hit a record low for the fifth consecutive month in March, in the wake of substantial declines in both same-day car trips from the U.S. and the number of visitors from overseas nations," Statistics Canada said.

Even before the reports were released, Carl Weinberg, chief economist at U.S.-based High Frequency Economics was telling clients that the Bank of Canada will have to cut interest rates at least another full percentage point to offset the impact of the U.S. economic slump, which it warned will get worse before it gets better, and to rein in the loonie.

The dollar, after reaching $1.0113 US, closed at a two-month high of $1.0083 US on Tuesday, up eight-tenths of a cent from $1.0002 Friday, prior to the long weekend.

Fuelling the currency's ascent was a further jump in already record-high oil prices to a close of $129.07 US a barrel, up $2.02 US, as well as higher prices for other resources. The jump in oil prices also helped lift the Toronto Stock Exchange's benchmark index to a new high of 15,047.34, up 63.14 points.

TD Bank reported Tuesday that its commodity price index rose by 1.2 per cent last to 40 per cent above year earlier levels, on strong gains in energy and agricultural product prices.

"On Friday, an investment house revealed a forecast for oil to average $140 US per barrel during the second half of 2008 giving prices a further boost," TD noted. "Crude oil prices started this week off strong, surpassing $129 US per barrel as markets focused on additional forecasts for $150 US per barrel oil."

CIBC World Markets said that the loonie's rise would have been even greater were it not for skepticism about the staying power of oil prices, and that markets are pricing in two further quarter-point rate cuts by the Bank of Canada and none for the U.S. Federal Reserve.

"We still see reasonable odds of the Fed returning to rate cuts this summer, leaving room for a further Canadian dollar rally," CIBC economist Avery Shenfeld said.

(prepared by Eric Beauchesne/Vancouver Sun)