Interest rate cut necessary: official

More interest rate cuts may be necessary to buffer Canada from the impact of the U.S. economic slowdown, according to the senior deputy governor of the Bank of Canada.

Paul Jenkins said "the risks surrounding the Canadian economy have shifted to the downside, resulting in our decision to lower our policy interest rate by 50 basis points to 3.5 per cent."

"We also said that further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the two per cent inflation target over the medium term," according to the text of a speech delivered Wednesday morning to the London, Ont., Chamber of Commerce.

The Bank of Canada's next interest rate decision will be made at its April 22 meeting.

Jenkins said the economy faces three key challenges -- a U.S. downturn and the related financial turbulence, global trade imbalances and competition from emerging-market countries.

"The most immediate challenge facing the global economy is the marked slowdown in the U.S. economy. This slowdown involves several interconnected elements, and, given our close trade links to the United States, has very direct consequences for Canada," he said.

"What we are now confronting is a marked slowdown in global economic growth, emanating primarily from the sharp correction underway in the U.S. housing market and the associated tightening in credit conditions linked to the collapse of the U.S. subprime-mortgage market."

Jenkins added that "it's important to note that some slowing in global economic growth was necessary. After five to six years of nearly unprecedented growth, levels of economic activity around the globe were straining capacity limits and beginning to put upward pressure on inflation.

"With global economic growth slowing, it is unlikely that the higher prices of food and energy will spill over into prices and costs more generally, but this risk is something central banks are watching closely. In other words, central banks are focused on keeping inflation expectations well-anchored."

Eric Lascelles, chief economics and rates strategist at TD Securities, said that while Jenkins' speech "did not signal any sharp change in perspective by the Bank of Canada, it did very firmly reinforce the bank's distinctly dovish interpretation of recent events and of the prospects for the future."

"Recent healthy economic numbers for January and robust job gains appear to have done nothing to boost the Bank of Canada's confidence, and we remain comfortable in our call for several more consecutive 50-basis-point eases from the bank."

(Source: Vancouver Sun)