Rate cuts expected next month

More economists now expect interest rate cuts in the months ahead as the strong dollar eats into trade.

Weak reports on international trade and manufacturing in the past week underscore that the economy likely wilted in the second half of the year. At the same time, the dollar's rise is reducing import prices and prompting retailers to cut prices - putting a damper on inflation.

It's led some economists to lower growth forecasts and predict the Bank of Canada is likely to cut rates, instead of remaining on hold.

Opinion started to shift last week, with Merrill Lynch Canada saying the probability of a rate cut at the bank's Dec. 4 meeting had tilted to greater than 50 per cent.

J.P. Morgan Securities Canada joined in yesterday, saying it now expects cuts in each of the central bank's next four decision dates through April, which would bring the rate to 3.5 per cent. Exporters are seeing margins squeezed, while "profit declines are expected to cause a sharp slowdown in employment growth," noted chief economist Ted Carmichael.

Royal Bank of Canada sees two cuts in the first quarter of next year.

"We do think the magnitude of the drag from the trade sector is going to be larger than the Bank of Canada expected," said senior economist Dawn Desjardins.Her comments come days after central bank deputy governor Paul Jenkins warned that if the dollar stays high, growth and inflation would be "significantly" lower.

Not everyone has joined the rate cut chorus. CIBC World Markets senior economist Avery Shenfeld said the central bank will likely remain on hold in December and through next year as the loonie, which closed yesterday at $1.0269 (U.S.), simmers down from its $1.10 record high.

(prepared by Tavia Grant/Globe & Mail)