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Canada interest rates

cut in bid to

boost slow economy

TORONTO: Canada's central bank chopped short-term rates on Monday for the seventh time this summer in a bid to spur lagging consumer demand and boost the country's sluggish economy, prompting major banks to cut their prime lending rates.

The Bank of Canada lowered its target range for the key overnight rate by a quarter of a percentage point to 6.0-6.50 percent.

Canada's six major banks matched the move with a quarter of a percentage point cut in their prime rates.

The Royal Bank of Canada, the Bank of Montreal, the Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and the National Bank of Canada all lowered their prime rates to 8.0 percent from 8.25 percent, effective Tuesday. The banks last cut their prime rates, charged on loans to their best customers, on July 12.

Analysts and economists said lower interest rates were expected and needed because Canada's economy remains anaemic, while a potentially destabilising Quebec referendum on partial separation from the rest of Canada is fast approaching. They said a sharp rise in the value of the Canadian dollar over the past week set the stage for the Bank of Canada easing.

"The rate cut was pretty much expected given that we had some excellent inflation news last week, the economy remains quite weak and the Canadian dollar has been very strong," said Warren Jestin, chief economist at the Bank of Nova Scotia.

Canada's consumer price index rose 2.5 percent in July on a year-over-year basis, down from 2.7 percent in June and is expected to edge lower for the rest of the year.

"With unemployment still running around 9.8 percent, I don't think inflation will be a concern," said Paul Ferley, assistant chief economist at the Bank of Montreal.

Higher interest rates and slow job growth have long kept Canada's beleaguered consumers out of the market for goods and services. Retail sales rose 0.6 percent in June, but Statistics Canada warned that early indications for the July number were "not encouraging."

"The lower rates certainly help to give a bit of a shot in the arm, but I don't think consumers will be going on a spending spree," Scotiabank's Jestin said.

He noted that Canadian consumers have record debt levels relative to their incomes while job creation has been "minimal" this year. Jestin predicted continued slow economic growth for the rest of 1995.

But Sherry Cooper, chief economist at Nesbitt Burns, said lower interest rates will help a rebound in consumer demand and attract more foreign investors to Canada.

"There is no question that international confidence in Canada seems to be increasing," she said. "Our fundamentals have been very positive for some time and there seems to be a little more confidence that Canada will come through the Quebec referendum unscathed."

The referendum, in which residents of the French-speaking province will vote on whether to secede from Canada, is expected to take place around Oct. 30. Quebec's separatist Premier Jacques Parizeau has promised to announce the date of the vote within the next week.

Concerns that the campaign preceding the vote could cause volatility in Canada's financial markets and weakness in the Canadian dollar may also have been a reason for Monday's interest rates decline, analysts said.

"I think it makes a lot of sense that they (the Bank of Canada) do it now as there is the potential of significant volatility as we get closer to the referendum," Cooper said. "And if that were to happen it is a lot easier on the economy if we are starting with lower interest rates."

Both Cooper and Jestin predicted more interest rate declines through the rest of this year.-Reuter