Bank of Canada cuts key rate to 50-year low

Tue Jan 20, 2009 4:00pm EST
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada cut its key interest rate on Tuesday by a half-point to a 50-year low of 1 percent, and predicted a period of falling prices this year as an economic recession takes hold.

The central bank signaled that further rate cuts may be on the horizon, but said it would judge carefully "to what extent further monetary stimulus will be required".

The latest move, which prompted a jump in the Canadian dollar, brings the overnight lending rate to a level comparable to that of July 1958, when the central bank used a different policy tool -- the bank rate.

Some analysts saw the bank's message leaving the door wide open to rate cuts in March to combat the effects of the worst global financial crisis in 80 years. In new evidence Canada's economy is in trouble, manufacturing sales plunged by a record 6.4 percent in November, data showed on Tuesday.

"Obviously we're in a dire situation right now, the employment situation is deteriorating fast, consumer confidence is very low right now -- at historical lows," said Martin Lefebvre, economist at Desjardins Securities.

But others suspected the bank was nearing the end of its easing cycle.

The outlook on rates is all the more uncertain as markets await the federal government's budget on January 27, which Ottawa has said will contain a large stimulus plan. Both Canada's and President Barack Obama's emergency spending plans will affect the speed and timing of Canada's recovery, analysts said.

"The path for the bank will be partly determined by what's in next week's budget but frankly how financial markets fare in coming weeks and months," said Doug Porter, deputy chief economist at BMO Capital Markets.   Continued...

<p>Bank of Canada Governor Mark Carney leaves his office for a news conference upon the release of the Monetary Policy Report in Ottawa in this October 23, 2008 file photo. The Bank cut its key interest rate on Tuesday by a half-point to a fresh 50-year low of 1 percent, as expected, and predicted a period of negative inflation this year as an economic recession takes hold. REUTERS/Chris Wattie</p>