October 8, 2008 / 12:08 PM / 9 years ago

Bank of Canada cuts key rate in coordinated move

<p>Bank of Canada Governor Mark Carney leaves his office for a news conference upon the release of the Monetary Policy Report in Ottawa July 17, 2008.Chris Wattie</p>

TORONTO (Reuters) - The Bank of Canada unexpectedly cut its key interest rate by 50 basis points to 2.50 percent on Wednesday in a coordinated effort with other central banks to help calm ailing financial markets.

In a statement that left the door open to further rate cuts, the bank said the intensification of the global financial crisis was impacting all countries and that conditions in global financial markets have worsened considerably.

"In recent weeks conditions in global financial markets have deteriorated sharply, the U.S. economy has weakened further, and commodity prices have fallen abruptly," the Bank of Canada said in a statement.

"As a result of these developments, credit conditions in Canada have tightened significantly, despite the relative health of our financial institutions."

The decision to lower its key rate ahead of its scheduled interest rate announcement on October 21 came along with rate cuts from central banks across the world, including the U.S. Federal Reserve, European Central Bank and Bank of England. China also lowered benchmark rates.

The Bank of Canada said weaker growth in the United States and other key trading partners will increase the drag on the domestic economy coming from net exports.

It also said the recent easing of the Canadian dollar will help cushion the effects of the weaker global outlook on the domestic economy but will not completely offset them.

The rate cut, which marks the bank's biggest interest rate cut since back-to-back 50-basis-points cuts in March and April, marks the first time since September 2001 that the Bank of Canada has moved on interest rates outside of its fixed announcement dates, which were implemented in 2000.

The Bank of Canada also said it will continue to monitor economic and financial developments, along with the evolution of risks, to judge whether further action may be required to achieve its 2 percent inflation target over the medium term.

The coordinated central bank action follows several weeks of carnage on financial markets around the globe, including massive losses on stock markets in the past week.

"I think the central banks will be watching to see if this does anything to stabilize confidence and improve the money markets," said Doug Porter, deputy chief economist at BMO Capital Markets. "If not, I think they are probably going to be willing to cut again if needed."

The Canadian dollar rose immediately after the bank's rate announcement, climbing as high as C$1.0997 to the U.S. dollar, or 90.93 U.S. cents, from C$1.1110 to the U.S. dollar, or 90.01 U.S. cents.

The Bank of Canada said its decision to cut rates will provide "timely and significant support" to the Canadian economy but that it will continue to assess whether more rate cuts would be required.

Some market experts felt the latest easing may be enough.

"Given our growth outlook that things will improve as we go forward we don't think there's any need for further ease depending on how well this is received," said Craig Wright, chief economist at Royal Bank of Canada. "One hopes this is well received given that most central banks are on the same page."

Reporting by Frank Pingue. Additional reporting by Jennifer Kwan and Scott Anderson, Editing by Chizu Nomiyama

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