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WORLD> America
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Canada cuts rates to 50-year low as recession hits
(Agencies)
Updated: 2008-12-10 10:39 OTTAWA -- Canada's central bank cut its benchmark interest rate on Tuesday more aggressively than most economists had expected, bringing it to its lowest level in 50 years and declaring for the first time that the Canadian economy is in recession.
The Bank of Canada, in a statement released before the stock market opened, said it was lowering its overnight target rate by three-quarters of a percentage point to 1.5 percent, the lowest it has been since 1958. In explaining its decision, the central bank said the world economic outlook had worsened in recent months. It now expects a "broader and deeper" global downturn than previously anticipated and sees the weakness taking its toll on Canada. "While Canada's economy evolved largely as expected during the summer and early autumn, it is now entering a recession as a result of the weakness in global economic activity," the bank said in a statement. It was the first clear admission by the bank that Canada is joining most major economies in sliding into recession, typically defined as two consecutive quarters of contraction, although Governor Mark Carney had hinted at it last month. After the announcement, the Canadian dollar extended its decline against the US dollar, while Toronto's S&P/TSX composite stock index was up slightly by midmorning. Rate Outlook Despite its stark message on recession, the bank's statement was less explicit than before on the need for more reductions in its overnight rate in January or beyond. It simply said it would monitor developments "in judging to what extent further monetary stimulus will be required". Even so, most analysts expect additional easing of lending conditions. "I think the commentary is realistic," said Craig Alexander, deputy chief economist at Toronto-Dominion Bank. "I expect that we will see another rate cut on Jan. 20 and I suspect it will be a half a point this time." Two of Canada's major commercial banks lowered their prime lending rates soon after the central bank's move. But both Toronto-Dominion Bank and Canadian Imperial Bank of Commerce cut their prime rates only by half a percentage point to 3.5 percent. The central bank said it sees core inflation, the measure of prices used to guide monetary policy, falling further than it had forecast in October. "As pressures on the downside build, there's probably the willingness to move further on rates, given that they're revising their inflation outlook," said Paul Ferley, assistant chief economist at Royal Bank of Canada. The last time Canada's central bank cut its overnight lending target rate by three-quarters of a point was in October 2001 following the Sept. 11, 2001, attacks in the United States. It has now lowered rates by 3 full percentage points since December 2007. |
