Canadian Interest Rate Cut Expected This Week

According to the Toronto Star analysts are expecting the Canadian overnight interest rate to be cut 25 points to 2.75 percent. The Star reports that:

"Inflation, which is always a major concern for the central bank, has been steadily weakening to the point that in July, the core inflation rate was below the bank's target.

And Friday's report of a dramatic slowing in the gross domestic product is also bound to affect the rate, even if central bankers will focus on a wider range of economic statistics.

Which leads to the following question: If the country needs an interest rate cut that badly, why will the cut only be 25 points? We shouldn't be surprised if the Bank of Canada makes the bold move of cuttign the overnight rate 50 points. This would cause the Canadian Dollar to drop, which should help sagging imports to the United States.

Important Links

• To learn more about how beliefs about future changes cause prices such as the interest rate to change today see "How Markets Use Information To Set Prices".

• To learn more about how central bank reactions to inflation and deflation influence interest rates see "What is deflation".

• To learn about the link between exchange rates and interest rates see my "Guide to Exchange Rates".

• You may also want to see "The Canadian Exchange Rate" which details the performance of the Canadian Dollar during the first half of 2003.