The Bank of Canada disappointed some analysts with its modest 25 basis point rate cut this morning. The Bank cut its key lending rate 25 bps, taking the target for overnight funds down to 2%.

“While the majority of analysts were looking for a 25 bps move, short-term money markets were geared up for a more aggressive 50 bps step and were somewhat disappointed,” notes BMO Nesbitt Burns. “Still, if the Fed does the expected and trims rates another 25 bps at the January 30 FOMC meeting, we expect the Bank to be right back at the plate with another rate trim on March 5.”

Royal Bank economists note that the Bank “appears willing to discount any near-term demand weakness”. But it suggests that one more 25 bps move is likely coming in March.

Based on the accompanying policy statement, BMO suggests that the Bank is tilting toward a neutral bias, but that it hasn’t closed the door on further rate relief.

“Although the easing cycle may be drawing to a close shortly, the Bank will be in no rush to move rates higher until very late in the year, at the earliest. Typically, there is an average gap of over nine months between the last easing move and the first rate hike in Canada. Thus, any possible move to tighter policy seems unlikely until we are deep into the fourth quarter, if not into next year.”

TD Bank economists also picked a much more optimistic note in the Bank’s policy statement, noting that uncertainty has diminished and downside risk has lessened. “While a final, token rate cut at the Bank of Canada’s next fixed announcement date on March 5th appears likely – especially if the Fed opts for another move at its January 30 FOMC meeting – it is by no means a slam-dunk,” TD argues.

“While Fed chairman Alan Greenspan’s speech last Friday provided hints that another rate cut may in store from the Fed, the Bank of Canada’s decision will depend squarely on the tone of the economic data on both sides of the border over the next six weeks. At this stage, the odds are still tilted towards enough signs of economic weakness to prompt the Bank of Canada to follow the Fed’s increasingly expected move.”