The Bank of Canada may have met market expectations with a 25 basis-point rate cut this morning, but market watchers are having trouble reading the central bank’s tea leaves for a firm indication of where rates will go from here.

BMO Nesbitt Burns Inc. says that the press release accompanying the rate decision was neutral, but didn’t close the door on additional rate cuts. “Basically, the world is largely unfolding as the Bank thought, so there’s no change in their view.”
BMO chief economist Sherry Cooper notes that exports have been surprisingly sturdy, but consumer spending and investment have disappointed.

“The Bank’s focus has been on supporting domestic demand, but if exports can do the job, the Bank won’t complain. Notably, the Bank made no mention whatsoever of the exchange rate (and its dampening impact) in today’s press release,” Cooper says. “The Bank is taking a wait-and-see stance before cutting rates again. Now it’s up to the economic data — if inflation or growth surprise to the low side, they will cut again in the spring. On balance, however, the Bank was not as overtly dovish as the market expected.”

TD Bank Financial Group chief economist Marc Lévesque, agrees that, “those hungry for signals as to the odds of another rate cut in April will have found little in the Bank1s statement to satisfy their appetite. In a nutshell, the central bank did little more than recognize that the economic data released since its last interest-rate decision on Jan. 20 and the update to its Monetary Policy Report on Jan. 22 were essentially in line with its revised outlook.”

Lévesque says the bank is sticking with its view that growth will not be strong enough to materially shrink the output gap by the end of the year, and therefore, to lift core inflation back to its target before the end of 2005. He says that, as long as the economic landscape continues to unfold in line with the Bank of Canada’s script, “we do not expect another rate cut on April 13th”.

Lévesque allows that the economic outlook remains highly uncertain, but he adds, the odds “do not favour another cut, but keep your eyes wide open.”

National Bank Financial notes the bank “suddenly appears to be a lot less concerned by the impact of currency appreciation and the persistence of excess capacity in the economy – probably rightly so.”

NBF argues that things “are starting to fall in place for the Canadian economy: the global economic recovery is unfolding at a brisk pace with the leading economic indicator of OECD countries at a 16-year high; the U.S. economy is on track to grow at least 4% for a third consecutive quarter for the first time in a decade; Canada is benefiting from a terms of trade improvement due to rising commodity prices; profits are holding up; and the labour market remains generally strong.”

“Though it refrained from using wording in its press release that could be interpreted as an outright neutral bias, it is fair to say that the Bank is no longer keeping the door wide-open on a further reduction in interest rates,” it says. “This morning’s rate cut may well have marked the end of the current monetary easing cycle. In our opinion, the most likely scenario for the Bank of Canada will be to maintain the overnight rate at its current level and follow the Federal Reserve’s lead before embarking on a tightening cycle.”

But RBC Financial Group economist Lesley Bearg suggests that the central bank was more overt in hinting that, “it is open to further rate cuts if necessary to support aggregate demand and to keep inflation within its target by the end of 2005.”