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Odds shorten for 50 basis point Bank of Canada

Tuesday, January 22, 2008

LONDON (Thomson Financial) - The odds of a larger than expected 50 basis point rate cut by the Bank of Canada have shortened considerably amid the latest bout of turbulence in stock markets.

The central bank had been widely expected to cut its base rate by a quarter point to 4.00 pct today but there is growing speculation of a 50 basis point reduction to 3.75 pct.

"The intensifying sell-off in Canadian equities, coupled with the looming risk of a US recession dragging Canada's economy into a more protracted slowdown and increased resistance by commercial banks to cut their prime rate may prompt the BoC to opt for a deeper rate cut," said Ashraf Laidi at CMC Markets.

A larger cut would benefit the Canadian economy as it would likely maintain Canadian rates equal to their US counterpart. After all the US Fed is widely expected to lower rats by 50 basis points to 3.75 pct on Jan 31.

"In order to hedge itself against the risk of renewed Canadian dollar strength emerging from deeper US rate cuts and a possible rebound in oil prices, the BoC will may consider the bigger option," he added.

Against this backdrop, the Canadian dollar today fell to a four-month low of 1.0377 per US dollar.

Stock markets around the world remain under pressure today after steep falls on Monday and increasingly, markets are looking to central banks for comfort.

"Clearly markets are baying for rate cuts, and this puts the Bank of Canada's decision today in the spotlight," said Marc Ostwald at Insiger De Beaufort.

Posted by MOHAMED SAID at 5:35 AM  

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