INTEREST RATES: lowering likely this week

Recession-wary consumers can probably expect a further cut in interest rates and news of another drop in the inflation rate this week, but with both at or heading toward record lows, there's not much room for further relief on either front.

And that leaves it to the government to finally step in do its part, which it is promising to do with billions of dollars in spending increases and tax cuts in its Jan. 27 budget next week.

Before that happens, analysts expect the Bank of Canada on Tuesday will cut its trendsetting target rate for overnight loans to the banking sector by a further half point to a record-low one per cent. If matched by chartered banks, it will bring the blue-chip prime rate, to which floating consumer and business loans are tied, to an all-time low of three per cent.

The "significant rise in unemployment and continuing weakness in economic activity, both global and domestic," will be cited by the central bank when it announces the rate cut, analysts at UBS Securities Canada said.

And there will be more evidence of economic weakness here and elsewhere as the week unfolds, including another retreat in domestic inflation as well and declines in Canadian retail sales and factory shipments, UBS projected.

"Plummeting gasoline prices likely helped the total consumer price record its third consecutive monthly decline, falling about 0.4 per cent month-over-month in December," it said.

UBS analysts are projecting the annual inflation rate -- the change in prices from a year earlier --will fall to 1.5 per cent and below the central bank's two per cent target, where it was in November, and down from 3.5 per cent just four months ago.

"Dramatically weaker new motor vehicle sales and plunging gasoline prices figure prominently in our forecast for retail sales to post a 1.4 per cent month-over-month decline for November," UBS said. "Weak manufacturing employment, lower commodity prices and reduced output lead us to believe manufacturing sales declined for the fourth month in a row in November, falling 1.2 per cent month-over-month."

The expected signs of further weakening follow reports so far this year of massive job losses, falling home sales and prices, continued declines in exports and imports.

The Bank of Canada, following its expected rate cut on Tuesday, will release its quarterly Monetary Policy Report Thursday, in which it will provide a further explanation of its interest-rate decision as well as an update outlook for the economy. Further explanations will follow at Bank of Canada governor Mark Carney's news conference after the report's release.

But much of the focus this week will be south of the border, in large part because of president-elect Barack Obama's inauguration. But also, it's what happens in the giant U.S. economy that will have the greatest impact on what happens to the Canadian and global economies.

However, outside of the celebration of Martin Luther King Day today, when U.S. markets will be closed, and the inauguration of Tuesday, there we be little to cheer, as analysts expect further evidence that the recession there is still deepening.

And that evidence will come from the sector that pulled the U.S. economy down, housing.

"Despite sitting at the lowest levels in at least half a century, housing starts tumbled a further 19 per cent in November," noted BMO Capital Markets economist Sal Guatieri. "But given the still near-record listings of existing homes on the market, sagging home sales and restrictive financing conditions, the construction landslide is probably far from over."

BMO is projecting the pace of U.S. housing construction starts continued to retreat in December, which in turn will take another chunk out of that economy's overall output in the final quarter of last year.

"The best housing affordability in three decades is up against accelerating job losses and tightening credit standards, and isn't faring well," Guatieri said, projecting there will also be evidence of further declines in housing prices.

(prepared by Eric Beauchesne/Vancouver Sun)