The Bank of Canada met market expectations today with a 25 basis point cut in the overnight rate to 4.5%. Some economists, however, are sounding the alarm.

Canada’s central bank has now cut rates by 125 bps so far this year. The U.S. Federal Reserve board has cut U.S. interest rates by 250 bps.

All along the Bank of Canada has maintained a rosier economic outlook that the Fed, but as BMO Nesbitt Burns notes, it is also more wary of inflation. “The bank also spent quite a bit of ink on the CPI outlook … the last line of the statement states ‘the Bank will need to be vigilant for signs of broader effects on consumer prices generally’ from the rise in energy prices. This is new, and suggests the bank was troubled by the April CPI, and likely prompted their decision to make the more moderate 25 bps rate cut today.”

However, the analysts at CIBC World Markets warn that “caution is not always the safest strategy. The same energy price hit to CPI that Greenspan has dismissed as a non-issue lies behind the less-aggressive approach to rate cutting on this side of the border. That’s a dangerously cautious strategy that the Bank could regret if the current slowdown tips over into outright recession.”

CIBC chides the Bank for “putting the cart before the horse” in worrying about inflation when the economy picks up again. “At this point, with Canada shuffling along at less than a 2% real growth pace, the immediate risk is that the U.S. falls into an outright recession and, almost inevitably takes Canada down with it. While this isn’t the John Crow Bank of Canada, which hiked rates just as the 1990-91 recession hit, the go-slow approach to rate cutting could unnecessarily stall Canada’s rebound to protect against what looks like a distant risk to core inflation.”

CIBC says that if the bank’s forecast for second half growth proves far too optimistic, as it expects, it is looking for another 100 bps in cuts over the next two quarters, “and possibly more if Friday’s key U.S. employment data show no improvement.

TD Bank economists suggest that inflation worries will keep the bank to 50 bps in further cuts, likely before the end of the summer. “In our view, the risks remain overwhelmingly tilted towards further economic weakness south of the border. There is not even a hint that the battered U.S. manufacturing sector is starting to turn the corner, and the labour market has been shedding jobs at an alarming pace over the past couple of months.”

BMO doesn’t make a call on the size of the future cuts, except to say, “The bank has not closed the door on future rate cuts, and indeed more are expected with the U.S. economy likely to struggle in the months ahead. However, the bank is clearly comfortable trimming rates in a measured, gradual fashion.”