Citing a list of unexpected setbacks to the Canadian economy, the Bank of Canada lowered its key interest rate today for the first time in almost two years.
The drop in the overnight lending rate, to 3 percent from 3.25 percent, reverses a steady rise in interest rates from April 2002 to April 2003 at a time when Canada boasted the strongest economy among major industrial countries. Today, however, the central bank cautioned that “in recent months, there have been a number of unanticipated developments that bear on the outlook for inflation and economic activity in Canada.”
Two setbacks have been health-related. An outbreak of severe acute respiratory syndrome, or SARS, has killed 40 people in the Toronto area since the end of March and has severely damaged the country's tourism industry. In addition, more than 30 countries, including the United States, have stopped importing Canadian beef since a case of mad cow disease was discovered in Alberta in late May.
Foreign demand for other Canadian exports has been dampened by a surge in the Canadian dollar, caused partly by a widening gap between Canadian and American interest rates in the last year. Today's drop in rates sent the Canadian currency sharply lower; it fell to 72.81 United States cents in the late afternoon, down nearly a cent. The currency reached a peak of almost 75 cents in mid-June.
In another move to encourage spending in Toronto, the government of Ontario has exempted hotels, restaurants and movie theaters from provincial sales tax until September.
The interest rate increases last year and early this year were fueled by growing concern about inflation. The consumer price index peaked at 4.3 percent for the year to February, well above the Bank of Canada's target of 1 percent to 3 percent. However, falling energy prices and the high Canadian dollar, which gives an edge to imports, have dampened inflation in recent months. The price index was up 2.9 percent in the year to May. “Inflation pressures have eased and more economic slack is opening up in Canada than was previously projected,” the central bank said in today's statement.