OTTAWA (Reuters) - 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 U.S. dollar, while Toronto’s S&P/TSX composite stock index was up slightly by midmorning.
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 January 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 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 September 11, 2001, attacks in the United States. It has now lowered rates by 3 full percentage points since December 2007.
Eleven of Canada’s 12 primary securities dealers had forecast the bank would cut rates by a half point and only one had forecast a cut of three-quarters of a point. For January, dealers were evenly divided between forecasting a half-point cut and a quarter-point cut.
The lowest rate on record was in 1958 at 1.12 percent. At that time, the key rate was determined by treasury yields rather than being set by policy-makers at the bank.
The global downturn has driven down commodity prices, resulting in lower incomes in Canada and plunging consumer confidence, the bank said. Job losses in November were the biggest in 26 years.
But Canada has a couple of factors working in its favor, it said. A depreciation of the Canadian dollar will offset some of the impact of the global recession, and ongoing and significant liquidity provision have led to improvements in money markets and overall credit conditions.
The bank’s move on Tuesday comes as the timing of government action to help stimulate the Canadian economy is uncertain because of political maneuvering in Ottawa.
Prime Minister Stephen Harper won a rare suspension of Parliament last week to avoid a vote of confidence that the minority Conservative government was expected to lose.
Parliament will resume on January 26 and Harper has promised the government will deliver a budget on January 27 that will include additional spending and other measures to stimulate the economy.
Even so, the opposition parties have said they may seek to bring down the Conservatives and seek to form their own coalition government.
Additional reporting by Ka Yan Ng and John McCrank in Toronto; editing by Rob Wilson