OTTAWA (Reuters) - The Bank of Canada cut its benchmark interest rate on Tuesday to a historic low of 0.25 percent and made no explicit commitment to taking nonconventional measures to spur the economy even as it predicted a deeper-than-expected recession.
It took the unusual step of providing guidance on rates, saying the overnight rate will stay at 0.25 percent until the end of the second quarter of 2010, conditional on the inflation outlook. The rate cut was contrary to majority expectations among primary securities dealers.
The central bank will on Thursday outline its strategy for possible nonconventional measures such as creating money to buy securities, but its statement on Tuesday gave no indication of its willingness to actually start using those policies immediately.
It outlined a series of technical adjustments it will make to reinforce the new overnight rate and avoid disorder in money markets. These included narrowing its operating band to 25 basis points from 50 basis points and making the overnight rate lower limit of that band as well as significantly increasing the balance in the settlement system.
The bank now sees the Canadian economy contracting 3 percent this year, compared to its projection in January of a 1.2 percent decline. Recovery will be delayed until the fourth quarter, not the third quarter as it previously thought. The bank also revised down its growth forecast for 2010 to 2.5 percent from 3.8 percent, which was widely considered overly optimistic. It sees total and core inflation staying lower longer, returning to the bank’s 2 percent target only in the third quarter of 2011 instead of mid-2011.
Reporting by Louise Egan; editing by Randall Palmer