Citing continued low inflation and sluggish growth, the Bank of Canada cut its key interest rate by a quarter of a percentage point today.
The reduction, which lowers the bank’s overnight rate to 2.75 per cent, was widely expected by analysts and financial markets.
It should also influence the major retail banks to reduce some of their consumer lending rates by the same amount.
In its second rate cut in two months, the central bank said that the rate of inflation continues to drop amid lingering signs of economic weakness.
That has opened up room for lower borrowing costs – at least, for now.
The soft economic conditions won’t linger, thanks in part to a stronger than expected rebound in the mighty U.S. economy, the central bank predicted.
“There are clear indications that conditions are in place for a strengthening of economic growth,” central bankers said in a statement.
“Evidence to date reinforces the bank’s view that growth in the Canadian economy will strengthen towards the end of 2003 and through 2004.”
Underpinning that expectation?
“The economic rebound in the United States began earlier and will be stronger, than previously expected,” central bankers said.
“As well, the tone of capital markets remains favourable.”
The cut today also reduces the bank rate – which used to be the most closely followed policy rate – to an even three per cent.
Analysts have been predicting a much stronger 2004 in both Canada and the United States amid signs of the long-awaited recovery south of the border.
Gross domestic product expanded by about three per cent on an annualized basis in the second quarter in the United States, which is by far Canada’s largest trading partner.
This country fell far short of that.
GDP was especially weak here in the April through June period, falling by 0.3 per cent on an annualized basis, primarily due to a series of shocks that hit the economy.
The trouble began early in the year, when a sudden and rapid appreciation of the loonie sideswiped exporters.
That was quickly followed by the SARS epidemic and the lone case of mad cow which has devastated the Western beef industry.
Since then, a massive power outage in Central Canada and continuing forest fires in British Columbia have also taken a huge toll（take heavy toll or huge toll, 造成重大损失）.
As the economic malaise（萎靡不振） continued, the cost of living has steadily declined to a core rate as low as 1.8 per cent in July – well below the central bank’s target.
That led the central bank to decide in mid-July to reverse its previous policy of tightening rates.
Markets were stunned when the bank lowered its key overnight rate by a quarter point to an even three per cent on July 15 amid signs of a weakening economy.
But many analysts now predict these two rate cuts may be all the Bank of Canada will want, hoping instead for signs of a recovery before year-end.
