Interest rate may fall

The Bank of Canada has set the stage to cut interest rates this fall, analysts said yesterday, after it suggested economic growth in Canada has fallen below expectations.

Evidence of whether the central bank's pessimism is warranted will emerge on Friday when Statistics Canada releases second-quarter economic results for the country. Warnings about second-quarter growth may also provide a clue as to why Prime Minister Stephen Harper is keen to hit the election trail as soon as possible, his political opponents charged.

In a speech in Kingston, Ont., David Longworth, the deputy governor of the Bank of Canada, said second-quarter economic growth "was likely somewhat weaker" than the 0.8 per cent the central bank projected. Moreover, he indicated the recent drop in commodity prices, triggered by weakening global demand, would mean lower inflation than expected.

Missing from Longworth's speech were key messages from the bank's last monetary-policy report -- that inflation risks were balanced and interest rates, as they stand, are appropriate. This did not go unnoticed by analysts.

"This could mean that the Bank of Canada is thinking about the possibility of rate cuts if it sees further signs of economic weakness," said Sal Guatieri, senior economist at BMO Capital Markets.

Derek Holt, vice-president of economics at Scotia Capital, said the central bank has adopted a "dovish" tone that could pave the way for further rate easing. He forecast rate cuts of 50 basis points to unfold in the final three months of the year.

The central bank is scheduled to announce its next move on interest rates on Sept. 3.

(prepared by Paul Viera/Vancouver Province)