Bank of Canada surprises markets with rate cut

Tue Apr 21, 2009 5:02pm EDT
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada surprised markets by cutting its benchmark interest rate to a historic low of 0.25 percent on Tuesday from 0.5 percent, saying it was prepared to keep it there for another full year in an aggressive bid to spur a slumping economy.

In an unusual move, the central bank told markets directly to expect rates to stay at the current level until the end of the second quarter of 2010, assuming inflation remains tame.

It also cut its economic growth forecasts to reflect its view that the Canadian recession will be deeper -- and recovery more gradual -- than it had previously predicted.

Nonetheless, it suggested that the cumulative rate cuts it has made since December 2007 may be sufficient to help turn the economy around, and that it may not have to print money to buy securities in the market, a policy known as quantitative easing.

It will, however, set out a framework on Thursday for that kind of unconventional policy.

"It is the bank's judgment that this cumulative easing, together with the conditional commitment (to keep rates steady), is the appropriate policy stance to move the economy back to full production capacity and to achieve the 2 percent inflation target," the central bank said in a statement.

The rate cut took markets by surprise and triggered an immediate fall in the Canadian dollar against the U.S. dollar to a three-week low of C$1.2507, or 79.96 U.S. cents. The currency later recovered to finish at C$1.2363 to the U.S. dollar, or 80.89 U.S. cents, up from Monday's close of C$1.2385, or 80.74 U.S. cents.

Canadian treasury bill yields also fell.   Continued...

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