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January 16th - Reuters

The Bank of Canada should consider cutting its key interest rate by 50 basis points next week to avoid unwanted appreciation in the Canadian dollar, JP Morgan said on Wednesday.

JP Morgan also said a half-percentage-point rate cut would provide greater incentive for commercial banks to lower their prime rates and mortgage rates, a scenario put into question after an article in Canada's Globe And Mail newspaper.

The Bank of Canada is expected to cut its overnight lending rate by 25 basis points to 4.00 percent on Jan. 22, while the U.S. Federal Reserve is expected to lower its key rate by 50 basis points to 3.75 percent later this month.

JP Morgan Chief Canadian Economist Ted Carmichael said in a note that scenario would widen the Canada-US interest rate gap and maintain unwanted upward pressure on the Canadian dollar.

A favorable Canada-US interest rate gap was one reason for the currency's strength last year, along with strong domestic data, merger-related interest, a weaker U.S. dollar and higher commodity prices.

But a lofty Canadian dollar, which topped parity versus the U.S. dollar in November 2007 for the first time since 1976 has been a drag on domestic manufacturers as their products became more expensive to U.S. customers.