The Bank of Canada dropped interest rates another 25 basis points this morning, but economists remain reluctant to call this the end of the current easing cycle.

The central bank dropped its overnight target rate to 4.25% this morning, following the latest cut in the United States. The bank rate also dropped to 4.5%.

Economists note that the cut was widely expected by the market, and that the bank’s accompanying policy statement echoed earlier comments about the U.S.-led slowdown and hope for a looming recovery. However, some analysts read further easing ahead in the bank’s remarks.

“In its post-announcement press release, the Bank of Canada pointed to the ongoing dampening impact of weak U.S. demand on Canada’s growth performance as the primary justification. However, in contrast to the statement that followed the previous rate cut on May 29th — when the Bank reintroduced inflation to its list of concerns — the Bank chose to downplay inflation risks in today’s remarks,” observe economists at TD Bank. “With inflation risks once again on the back burner, the Bank of Canada will be able to focus its energies on kickstarting Canada’s sluggish economy over the near term.”

CIBC World Markets also saw an easier attitude to inflation in the bank’s comments, too, but CIBC also noted a hint that the rest of the world’s economies may be weaker than expected. It also sees further rate cuts ahead. “The combination of a greater leverage to energy and a tax cut at the start of the year had heretofore helped the Canadian economy fare better. But with the U.S., not Canada, next to see the benefit of a tax reduction, and the energy drag on American growth beginning to fade, it’s the northern half of the continent that will have to play catch up in providing monetary policy stimulus.”

TD says that the Bank of Canada’s unrelenting optimism on the economy for the second half of 2001 suggests that the easing cycle is fast approaching an end. Still, it sees one further 25 basis point rate cut in both Canada and the U.S. in late August. “However, as both economies begin to revive by year-end, the Bank of Canada and the U.S. Federal Reserve are likely to move their policy settings to a more neutral level, raising rates by 100 and 150 basis points, respectively, in 2002.”

BMO Nesbitt Burns acknowledges that the central bank’s statement indicates a willingness to cut rates further, despite substantial cuts that are already in effect this year. It declines to make a prediction itself.

CIBC is not so cautious, it calls for another 50 bps in cuts still to come. “If, as we expect, the Bank of Canada sees its hopes dashed for a sharp U-turn in American goods demand, much more rate relief will be needed to keep the Canadian economy in gear. With inflation likely to drop at least as fast as the central bankers’ forecast, there will be less reason to hesitate in delivering that growth boost. It will take another three quarters given a cautious Bank of Canada, but the overnight rate will ultimately fall to as low as 3.25%.”