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Canadian interest rates to tumble


Blog by | January 10th, 2008


Canadian interest rates to tumble: Merrill

 

Wednesday, January 09, 2008

The Canadian economy is poised for a sharp slowdown as U.S. demand weakens and that, combined with cooling inflation, spell much lower interest rates in the coming year, Merrill Lynch Canada predicts.

Economist David Wolf sees a 125 basis-point cut in interest rates this year, which would bring the Bank of Canada's key lending rate to just 3 per cent.

It's a rather bleak outlook, and one that came the same day Goldman Sachs said the U.S. economy is already likely falling into recession, while former U.S. Treasury Secretary Lawrence Summers said the chance of a U.S. recession this year is at least 60 per cent.

“Canada is destined to play a primary role in global economic rebalancing away from American demand, given its proximity to the U.S., its openness to trade and its strong currency,” Mr. Wolf said in Merrill's economic outlook.

That means a swing to current account deficit as exports buckle, lower inflation and overall weaker GDP growth “as Canada's economy is thrown off-balance in 2008,” he predicted.

He expects the Canadian economy will grow 1.7 per cent this year, much slower than 2.6 per cent last year, while core inflation could fall to 1.5 per cent from 2.2 per cent. Canada's benchmark stock index will likely slide about 4 per cent this year as earnings deteriorate, he expects.

Goldman, meantime, expects the Federal Reserve will slash its key lending rate to 2.5 per cent by the third quarter from 4.25 per cent currently.

It doesn't, however, see a prolonged, deep contraction.

“The recession is likely to last two to three quarters and should be relatively mild by historical standards,” its report said, as interest-rate cuts, tax cuts and exports stay strong.

The World Bank also chimed in Wednesday, saying 2008 global growth will slow for the second year in a row amid tighter credit markets and more expensive oil prices.

“A weaker U.S. dollar, the spectre of an American recession and rising financial-market volatility could cast a shadow over this soft landing scenario for the global economy,” the bank warned in its annual forecast.

Global markets have entered a period of “heightened uncertainty,” it said, adding that growing risks and increased volatility have made some developing countries “more vulnerable to financial disturbance.”

It sees global growth this year of 3.3 per cent — down from its previous forecast of 3.6 per cent — after 3.6 per cent growth last year and 3.9 per cent in 2006.

 

Alexandra Rebagliati
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