Bank Of Canada’s Interest Rate Cut

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The Central Bank of Canada (BOC) cut the interest rate by 25 basis points (bps) to 4.25%.

Is this rate cut justified?

Considering the economic growth and relative economic data, the BOC did not have to cut the rate, but leave it unchanged. The rate cut decision by the BOC appears to be a tough one.

This decision is purely based on the need to cool down the soaring loonie, as the inflationary pressure is still persistent in the economy. Current rate cut move by the BOC appears like an indirect policy intervention in keeping the loonie low.

Rate cut decision suggests that the Canadian economy is the trailer economy to the US.

The expected effect on the Canadian economy maybe :

* Increase in inflationary pressure ;

* Temporarily, the loonie will hit a low of USD 0.9510 and it should be range bound for the rest of the month, between USD 0.9510 and USD 0.9940.

The logical argument behind the rate cut would be that, the Canadian economy does not have sufficient competition to keep the prices in check, as the stronger loonie was not reflected in consumer pricing and the overall economy. Due to this the BOC had to take this decision of Interest Rate Cut.

The Outlook of the Canadian economy will remain positive for the period of 2008.

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