Prediction Bank of Canada will cut interest rate

One of the leading economists on Bay Street predicted yesterday that the Bank of Canada will begin cutting interest rates next month or perhaps even sooner to deal with the meltdown in the U.S. financial system.

The call is from David Wolf, economist from Merrill Lynch Canada, who in a note to clients said the Bank of Canada is expected to cut its key lending rate by at least 25 basis points, and perhaps 50 basis points, on Oct. 21, at the central bank's next scheduled interest-rate announcement. However, he said it is possible the bank may move earlier, given the seriousness of the U.S.-based financial crisis.

"It is now apparent that the enormously levered and deeply entangled financial world in which we live cannot accommodate the kind of plunges in asset prices we've seen.

"While the situation remains fluid and the ultimate fallout cannot be predicted with confidence, it seems clear that the de-leveraging process already under way is accelerating, further squeezing the credit lifeblood of the economy from a trickle to a drip."

Eventually, the central bank will move to cut its benchmark rate by a full percentage point to two per cent, he said.

"In short, we believe that the further tightening of global financial conditions and the associated intensification of downside risks to Canadian growth and inflation warrants more aggressive Bank of Canada action ahead," Wolf said.

This week, the U.S. Federal Reserve held interest rates steady at two per cent. Had the U.S. moved to cut its key rate, analysts had said there was a chance the Bank of Canada would follow suit.

But with commodity prices set to drop further as global demand weakens in the light of the turmoil in financial markets, Wolf said that would likely to push inflation below the central bank's two-per-cent target, giving the Bank of Canada room to manoeuvre.

(prepared by Paul Vieira/Vancouver Province)