Canada cuts rates to record low

Tue Mar 3, 2009 5:55pm EST
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada cut its main interest rate to a record low on Tuesday and signaled for the first time that it may take extra steps to pump money into a system that remains stubbornly short of credit.

The central bank reduced its key overnight rate by a half point to 0.5 percent, as expected, for a cumulative reduction of 400 basis points since December 2007.

As the rate approaches zero, the bank began preparing markets for its next step, which could involve buying securities in the market to drive down longer-term interest rates and help banks expand their lending. This is known as quantitative easing.

It also did not close the door to an additional rate cut to 0.25 percent.

"Given the low level of the target for the overnight rate, the bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing," it said in a statement.

But the bank said it would not outline the framework for any such action until after its April 23 Monetary Policy Report, two days after its next scheduled rate decision.

"It's sort of the nuclear option," said Eric Lascelles chief economics and rates strategist at TD Securities.

"They refuse to rule out the possibility of more rate cutting and they seem to be very seriously thinking about quantitative easing ... it suggests the Bank of Canada is very serious about this situation and it recognizes it's probably been a little too optimistic recently in terms of the outlook," he said.   Continued...

<p>The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie</p>