Tuesday December 9, 05:05 PM
Bank of Canada slashes rate, confirms recession
OTTAWA (AFP) - The Bank (NASDAQ: TBHS - news) of Canada slashed its key interest rate Tuesday by 0.75 percentage points to 1.50 percent in a move to fire up growth, saying the global economic turmoil had pushed Canada into recession.
"The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated," the central bank said in a statement after cutting its overnight rate.
"Global financial markets remain severely strained. Measures taken by major governments are beginning to encourage credit flows, although it will take some time before conditions in financial markets normalize."
The Canadian central bank said the economy was contracting as part of a worldwide slowdown.
"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 recession call came even though the Canadian economy grew 0.3 percent in the third quarter.
The rate cut was larger than market expectations of a half-point reduction.
"With the loss of support from consumers and domestic demand, tanking trade amid the global downturn, and low commodities prices prompting resource industries to scale back capital spending, the central bank decided to deliver a deep monetary stimulus by slashing its target rate to its lowest in 50 years," said economist Bodhi Ganguli at Economy.com.
"The bank now expects the global recession to be broader and deeper than previously expected implying depressed demand for Canada's export sector."
The central bank in October trimmed a quarter-point from its overnight rate target at its last meeting policy-setting meeting and a half-point in a concerted action with the Federal Reserve and other major central banks.
Central banks around the world continue to slash interest rates in the face of the deepening financial turmoil. Last week the European Central Bank cut its benchmark cost of borrowing by a record 0.75 percentage points to 2.50 percent as the 15-nation eurozone faced its first recession, and the Bank of England cut a full point, taking its key rate to 2.0 percent, a level last seen in World War II and its immediate aftermath.
The Canadian central bank move also comes amid a political crisis in Ottawa which led to the suspension of the federal parliament last week, blocking any economic recovery plan until the end of January.
"The bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2.0 percent inflation target over the medium term," the Bank of Canada said.
Dawn Desjardins, assistant chief economist at RBC Economics Research, said the central bank is leaving the door open to further cuts until growth is revived.
"Policymakers did not close the door to providing support through additional rate cuts," she said.
"However the tone in today's statement hints of some confidence that the accommodative level of monetary policy and liquidity provisions will be sufficient for the Canada's economy to emerge from the current economic slowdown."
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