The Bank of Canada should cut rates again, says Sherry Cooper, BMO Nesbitt Burns Inc.’s chief economist.

Cooper says in a report Friday that in an environment coloured by political turmoil, “the Bank of Canada becomes all the more important to provide a stalwart underpinning for an economy that has been badly beaten up by last year’s plagues and the sharp rise in the Canadian dollar. No longer can we depend solely on a currency advantage to gun the engines of export growth. To be sure, we benefit from the revived expansion in the U.S. economy and the solid rise in commodity prices, but a strong domestic economy is also essential to a sustained period of economic expansion.”

The Bank appears to be worried about Canada’s lagging productivity and weaker growth prospects relative to the U.S., Cooper says, citing comments this week by senior deputy governor Paul Jenkins and governor David Dodge. She notes that the Fed is forecasting growth of 4.5%-to-5% for the U.S. in 2004, compared to the Bank of Canada’s expectation of only 2.75% growth here.

Canada is following a tight fiscal policy, compared to the expansionary U.S. track. And, Canada faces falling net exports relative to GDP, while the U.S. is seeing its’ trade situation improve. “On a trade-weighted basis, the Canadian dollar has appreciated far more than the euro, yen or pound sterling simply because trade with the States looms so much larger for our economy than for the others. This requires adjustment – a significant adjustment, which is beginning to happen,” Cooper says.

With Canadian labour no longer coming at a huge discount, Cooper says that Canadian firms will have to rely more on productivity-enhancing technology. “It also means that the Bank of Canada should conduct a more accommodative monetary policy to help offset the tightening effects emanating from the currency’s rise and the fiscal stringency. So the Bank should lower interest rates again in March when they next meet, and maybe even again in April,” she says. “Taking Mr. Greenspan at his word, he will be patient in hiking U.S. short-term rates, so the Bank has a window to act unilaterally. This is especially important because the U.S. dollar may well fall further.”

“In this environment, the Bank of Canada can afford to give Canadians another break on rates. This will provide the cushion during the transition period to a more productive and competitive export sector. Monetary policy, not exchange rate policy, is now the underlying shock absorber for the economy,” Cooper concludes.