RBC assistant chief economist Dawn Desjardins said continuing turmoil on global financial markets, combined with a deteriorating outlook for the U.S. economy, is stalling Canada's growth and will likely lead to a 50 basis point cut in the overnight target rate on Oct. 21.

The Bank of Canada joined with other major central banks around the world on Oct. 8 and sliced 50 basis points from the overnight target rate, bringing it to its lowest level in more than four years.

However, Desjardins said, despite the global effort to ease market concerns and shore up investor confidence, "financial markets continue (to) flail with equity markets unable to sustain gains." Wholesale funding costs have started to ease but remain elevated meaning that the cost of capital for businesses and households is staying high and availability of credit is limited, she said.

"Given the steady decline in commodity prices since Oct. 8, inability of equity markets to sustain an improved tone and increasingly weak U.S. data reports, we think it is likely that the Bank will choose to act aggressively next week and cut the policy rate to 2%," Desjardins said.

"Should the Bank decide to hold the policy rate steady or cut by a smaller 25 basis point increment next week, we would look for a cut at the December meeting meaning that the overnight rate would still end 2008 at 2%."

Desjardins said she also expects to see the U.S. Federal Reserve lower its funds rate by another 50 basis points before the year is out "with the odds favouring the move at the Oct. 29 meeting."

By Geoff Matthews, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it

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