Canada’s growth outlook has deteriorated noticeably in recent months. Theescalation in the financial market crisis in October has resulted in a markedtightening of lending conditions.

The Canadian economy is currently being decisively influenced by three developments: The persistently weak US economy, the financial market crisis which is still raising its ugly head and the recent surge in consumer prices.

The ongoing crisis on the financial markets and the gloomy economic outlook for the US economy prompted the Bank of Canada (BoC) to trim its key interest rates by 50 basis points, taking them down to 3 %, in the second half of April. It was the third cut this year, and the second 50bp reduction in a row. We expect the BoC to announce further cuts in rates in the course of this year.

The Canadian economy is also feeling the chill winds of the global turmoil. Above all the increasingly evident slowdown in the US will put a dampener on the upward trend in Canada given the two countries’ close trade ties.

In December the Bank of Canada (BoC) lopped 25 basis points off its overnight rate target, pointing to the turmoil on the financial markets. It thus corrected its surprise hike in July of this year which the bank had justified at the time with signs of economic overheating.

The Canadian central bank opted to tighten the monetary reins in mid-July andcaused something of a surprise by raising key rates by 25 basis points to 4.5 %.

The Canadian economy closed 2006 with an altogether weaker result. In the first quarter the economy had expanded by a robust 3.8 %, but in the fourth quarter growth slowed to 1.4 %, with the slump in demand in the USA contributing to this. The generally subdued development in its neighbor to the south is likely to dampen private consumption further in the face of lower wage growth.

After a positive start to the year, second quarter growth in Canada and Australia was disappointing. However, the monetary policy implications are likely to differ.

The Bank of Canada and the Reserve Bank of Australia raised key interest rates further in May while New Zealand maintained its restrictive monetary course.

In Canada, Australia and New Zealand the economies would appear to be developing along essentially different lines. The New Zealand economy is heading for choppy waters.

In October, the Bank of Canada and the Reserve Bank of New Zealand responded to increased price risks by jacking up interest rates further. These moves should also been against the background that current inflation rates, fueled by higher energy prices, are already above the 3 % ceiling of the target corridor that applies in both countries.

In Canada, Australia and New Zealand, divergences in the fundamental trends of domestic demand were evident of late. The impending slowdown in New Zealand could well accelerate the depreciation of the country’s currency.

The interest rate policies of the central banks of the so-called dollar bloc have not been in sync since the beginning of 2004. This year, too, different backdrops will apply in the pursuit of the respective inflation targets. Overall, the potential for substantial rate hikes appears limited.

Economic trends this year were influenced by distinctly improved terms of trade. However, with the global economy expected to slow, this stimulus could unwind, allowing the indirect growth-dampening effects to feed through all the more.