The Bank of Canada today cut its target for the overnight rate by one-half of a percentage point to 3%, as it warned of softer economic growth this year.

The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 3.25%.

The bank also reduced its outlook for economic growth, trimming its forecast to 1.4% for this year. In January, the bank said it was looking for 2008 growth of 1.8%.

The bank also trimmed its 2009 forecast by 4/10ths of a percentage point to 2.4%. By 2010, growth is seen rising to 3.3%.

“The bank is now projecting a deeper and more protracted slowdown in the U.S. economy,” the Bank of Canada said in a statement with the rate announcement.

“This has direct consequences for the Canadian economic outlook, with declining exports projected to exert a significant drag on growth in 2008. In addition, tightening credit conditions and softening sentiment are expected to moderate business investment and consumer spending.”

The bank added that Canadian demand is projected to remain strong, supported by firm commodity prices, high employment levels and the effect of the Bank of Canada’s interest rate cuts.

The central bank left the door open for more rate cuts if they are needed to keep the economy moving.

Bay Street economists see more rate cuts ahead, but they are also starting to see the likely end to the rate cutting on the horizon.

National Bank Financial notes that this decision was in-line with market expectations, and it says that the bank also maintained an easing bias over the medium term. “In light of the current tame inflation backdrop in Canada and given the deteriorating outlook for U.S. economic growth, we believe that our central bank was justified to opt for a second 50 basis points rate cut in a row while keeping its easing bias in place,” NBF said.

NBF says that the two years of below trend-growth are expected to keep inflationary pressures contained through 2009 — hence the bank’s decision to keep its easing bias through the medium term. “Looking ahead, we would expect the BoC to return to a more gradual approach (25 bps instead of 50 bps increments). This being said, we remain of the opinion that only a modest further easing (towards 2.5%) should be expected before the BoC moves to the sidelines for a prolonged period as we are still projecting a lacklustre U.S. recovery in 2009,” it concludes.

RBC Capital Markets notes that policymakers still characterize Canada’s domestic economy as buoyant, supported by the improved terms of trade and strong labour market, but it adds that worries about the impact of the tightening in credit conditions and the flagging U.S. economy on the outlook for exports resulted in downgrades to Canada’s 2008 and 2009 GDP forecasts.

“While the statement still points to further easing the language is less definitive than in the March statement, suggesting that the bank is shifting to a less aggressive stance. After a modest downgrade to the inflation forecasts, the bank now views the risks as being balanced,” observes RBC.

“Although the statement still leaves the door open to further downward adjustments in the policy rate, the degree of future easing is likely to be limited. We look for the bank to lower the overnight rate in June to 2.75% and then look for policymakers to shift to the sidelines for the remainder of the year,” predicts RBC.

TD Economics says that the bank’s statement for “some further monetary stimulus” in the future may be a bit softer. “However, the bank’s forecast for Canadian economic growth in 2008 and 2009 still seems optimistic. Therefore, we continue to think that another 50 bps cut at the next meeting on June 10th would be warranted given the balance of risks to the economy,” it says.

“The Bank of Canada has moved aggressively, and the statement twice noted the “cumulative” 150 bps of rate cuts to-date –a big insurance policy to limit the downside for growth. While we still look for another modest trim in rates at the next decision date on June 10, that may be the end of the line for rate cuts, especially if credit conditions stabilize,” adds BMO Nesbitt Burns.


The Bank of Canada will provide more details on its outlook for the economy on Thursday, when it releases its latest monetary policy report.

@page_break@The bank’s next scheduled date for announcing the overnight rate target is June 10.