Bank of Canada could slash interest rates in a big way next year

Chris Wattie/Reuters

 

Bank of Canada Governor Mark Carney.

  Nov 9, 2011 – 4:10 PM ET | Last Updated: Nov 9, 2011 4:50 PM ET

 

As the nail biter in Europe continues this week, two economists are predicting the Bank of Canada will move to cut rates in a big way next year.

Sheryl King, an economist at Bank of America Merril Lynch, said in a note that the volatility hitting Europe and the risk of damage to the global economy means the Bank of Canada will move to cut rates by a whopping 0.75% from the current 1%.

“With the Eurozone sovereign debt and banking crisis showing no sign of containment, we think the Bank of Canada will cut rates back to the effective lower bound of 25 basis points (0.25%) early next year,” she said.

Also predicting a lower interest rate were economists at Capital Economics, who forecast a more mild cut of 50 basis points that they expected to occur in April or June. They also added that rates were likely to stay low for years from here on out.

 

“The Bank might communicate that its policy rate will remain at 0.50% for a lengthy period of time, conditional on its projected outlook for consumer price inflation,” David Madani, Canada economist at Capital Economics said. “Even if we are wrong, the broader message remains that interest rates will remain unusually low for a very long time.”

Most economists, however, are still predicting that the Bank of Canada will move to raise rates rather than lower them. In a recent Reuters survey of 40 economists last month, the consensus was that the Bank of Canada would move to raise rates in the third quarter of 2012.

Canada became one of the first advanced economies to raise its benchmark interest rates following the recession. The Bank of Canada last raised its rate in September 2010, moving it up by 25 basis points to 1%. It has since held the rate unchanged at 1%

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