BANK'S KEY RATE CUT TO RECORD LOW
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OTTAWA — The Bank of Canada has chopped its key interest rate by another half percentage point to its lowest level ever, and warned that the Canadian economy will contract by 1.2 per cent this year.
The central bank's target for the overnight lending rate now stands at 1 per cent – lower than in 1958, when the most-watched policy rate was 1.12 per cent.
“The outlook for the global economy has deteriorated since the bank's December interest rate announcement, with the intensifying financial crisis spilling over into real economic activity,” the bank said in its gloomiest statement yet.
In separate announcements, Toronto-Dominion Bank and Bank of Montreal responded by announcing they have cut their prime lending rates by 50 basis points to 3 per cent. BMO said it is cutting key mortgage rates by 30 to 50 basis points.
Last fall, the bank had counted on the Canadian economy growing by 0.6 per cent this year. But since then, it has recognized that Canada is in recession, and now says the economy will shrink by 1.2 per cent in 2009, as the country succumbs to sagging global demand, lower energy prices and a collapse of confidence around the world.
“Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence,” the bank said.
Already down in overnight trading, the Canadian dollar fell further after the bank's announcement, and was down 0.84 cents U.S. to 78.90 cents just after 9 a.m. ET.
Since slack is building up in Canada 's economy and housing prices are coming down modestly, inflationary pressure should also ease, the bank explained.
Total inflation will likely fall below zero for much of 2009 because of lower energy prices. And even core inflation, which excludes energy and other volatile items, will drop to about 1.1 per cent at the end of this year, the bank said.
But the central bank sees a remarkably strong recovery in 2010, with the Canadian economy growing 3.8 per cent next year and inflation edging back up to hit the bank's two per cent target in early 2011.
In order for the recovery to take hold, the global financial system has to stabilize, the bank said, but added that that process has begun, “There are signs that these extraordinary measures [by governments and central banks] are starting to gain traction, although it will take some time for financial conditions to normalize,” the statement said.
Plus, the global economy should start to benefit from “considerable” monetary and fiscal stimulus, the bank said.
Canadian banks have come under criticism for failing to pass on to customers the full amount of recent previous rate cuts by the Bank of Canada.
Canada 's recovery should also be bolstered by the past depreciation of the Canadian dollar, the statement added.
The bank did not promise any further interest rates to follow. Instead, the bank pointed out that it had already reduced its key rate by three and a half percentage points since December 2007, and added that it would keep an eye on how the economy and markets develop, and decide accordingly what it should do with rates.
“Guided by Canada 's inflation-targeting framework, the bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required,” it said.
Economists have warned that central banks need to be prepared to quickly reverse their aggressive interest rate cuts of the past year as soon as they see signs of recovery. Otherwise, there is so much monetary and fiscal stimulus floating around that today's disinflation could easily turn into an inflation problem when economies begin to grow again.
Economists have also been on the lookout for alternative forms of boosting the economy, aside from interest rates, with the U.S. Federal Reserve's key rate already hovering around zero, and the Bank of Canada at its lowest level too.
While Bank of Canada Governor Mark Carney has said previously that he is examining his options, there was no suggestion in Tuesday's statement that any non-conventional measure is imminent.
Still, with the federal budget just a week away, the government is expected to introduce several easing mechanisms, as well as a huge stimulus program to help ease the bite of the recession.
The Bank of Canada will issue a more complete economic outlook on Thursday.
Contact Betty Bartusevicius for further information of this article at
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