The unexpected decision by the Bank of Canada on Tuesday to cut its key interest rate by a quarter point to 4.25 percent will probably do little to help exporters struggling to cope with a rising Canadian dollar, economists said.
In announcing the reduction, the Bank of Canada also reversed its previously optimistic outlook for the US economy, citing concerns about the subprime mortgage problems.
"Anticipated losses on US subprime mortgages have worsened since mid-October and are expected to persist for a longer period of time," the bank said in its announcement. "In these circumstances, bank funding costs have increased globally and in Canada, and credit conditions have tightened further."
Jayson Myers, chief economist of the trade group Canadian Manufacturers and Exporters said the rate cut was an indication that the nation's resource wealth did not provide an escape from the uncertainty in the US.
"The Canadian economy is not freewheeling," Myers said. "It's still very closely tied to the North American market."
Leading up to Tuesday's decision, the Bank of Canada was faced with conflicting situations. High oil and commodity prices have kept Canada's economy generally buoyant and arguably overheated in some regions, particularly energy-rich Alberta. But the rise of the Canadian dollar to parity and beyond with the US dollar has squeezed manufacturers in Ontario and Quebec, whose exports are often priced in US currency.
Although the bank appeared relatively unconcerned about the dollar's high level in its rate announcement, the currency did give it leeway for its interest rate cut. It said October's inflation rate of 2.4 percent was below its expectations, a factor it attributed to price cuts on imported merchandise.
After the announcement, the Canadian dollar fell to C$0.9878 from a close of C$0.9998 on Monday. While that is a large swing in currency market terms, it will not provide significant benefit to exporters. A year ago, the Canadian dollar traded at C$0.87.
"The rate cuts do not reverse things for our members," Myers said. "Their cash flow is under tremendous pressure because of the dollar, so it's difficult to get financing."
Douglas Porter, deputy chief economist of BMO Capital Markets, a unit of the Bank of Montreal, said he anticipated at least one more rate cut even though a second cut was unlikely to bring exporters the currency relief they want.
"Perhaps it will take some of the edge off the currency and reduce the chances it will go to C$1.10 soon," he said.
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