Canada Cuts Rate by 50 Basis Points as Economy Slows (Update3)

April 22 (Bloomberg) -- The Bank of Canada lowered its benchmark rate by half a point to revive an economy that's growing at its slowest pace in 16 years, and signaled more easing may be needed ``in the medium term.''

The rate on overnight loans between commercial banks dropped to 3 percent, the lowest since December 2005, as forecast by 28 of 32 economists in a Bloomberg survey.

The Canadian dollar fell as some investors bet that the statement signals borrowing costs will be lowered again in the next few months. Policy makers reduced their 2008 economic growth forecast to 1.4 percent, the lowest since 1992, from a January forecast of 1.8 percent, and said inflation will stay below their 2 percent target until 2010.

``Obviously the risks are the Bank of Canada will cut more going forward,'' said Karen Cordes, an economist at Scotia Capital Inc. in Toronto.

Cordes, who predicts a quarter point reduction at the next meeting, scheduled for June 10, said the central bank's statement ``leaves the door open for more than we were previously expecting.''

The Canadian currency weakened 0.7 percent to C$1.0123 per U.S. dollar at 10:21 a.m. in Toronto, from C$1.0054 yesterday.

Canada sends about three-quarters of its exports to the U.S., and the economic crisis in that country has sapped demand for Canadian lumber and cars.

`Medium Term'

``Some further monetary stimulus will likely be required to achieve the inflation target over the medium term,'' the bank said today. ``The timing of any further monetary stimulus will depend on the evolution of the global economy and domestic demand, and their impact on inflation in Canada.''

Policy makers will cut the key rate again at their June meeting unless the economy turns around, said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. The central bank dropped a reference from its March 4 statement, which hinted rates would be cut again in the ``near term.''

``They don't want the market to assume they will be cutting in June just yet,'' Porter said. Still, he said, ``it's reasonable to assume a quarter point trim in June.''

The rate cut narrows Canada's biggest rate premium over the Federal Reserve's benchmark in four years, a gap that's kept the currency close to parity with the U.S. dollar. Traders anticipate the Fed will lower its 2.25 percent rate by a quarter of a point on April 30, as the U.S. economy may already be in a recession.

Subprime Fallout

The Bank of Canada, on its own and in tandem with counterparts in the U.S. and Europe, has pumped billions of dollars into the financial system, accepted new collateral on loans and sought wider powers to tackle problems stemming from the U.S. subprime mortgage collapse.

Prices excluding eight volatile items -- the gauge used by policy makers to predict trends -- advanced 1.3 percent last month from the year before, the slowest since July 2005.

Overall consumer prices rose 1.4 percent in March from a year earlier, slower than U.S. inflation of 4 percent and German inflation of 3.3 percent.

The central bank releases an updated inflation and economic growth in two days, followed by a press conference by Governor Mark Carney.