Central bank says Canada in recession, slashes policy rate to 1.5 per cent

By THE CANADIAN PRESS Tuesday, December 9, 2008

OTTAWA - The Bank of Canada slashed its key interest rate to the lowest level in half a century Tuesday in an aggressive move to help rescue an economy it now officially declares is in recession. Central bank governor Mark Carney cut the trendsetting rate by three-quarters of a point to 1.5 per cent, the lowest since 1958. It was the single biggest reduction in the overnight rate since October 2001 in the aftermath of the 9-11 terrorist attacks, and exceeded the expectations of most economists. The consensus private-sector forecast had been for a half-point cut. But in a gloomy assessment of the Canadian and world economies, the central bank said the situation continues to deteriorate so rapidly that even more reductions to short-term interest rates may be necessary."The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated," it stated. "While Canada’s economy evolved largely as expected during the summer and early autumn, it is now entering a recession," it added. "The recent declines in terms of trade, real income growth, and confidence are prompting more cautious behaviour by households and businesses."

Lower interest rates, if passed on by the commercial banks, encourage businesses and households to borrow and spend for expansion and consumer goods, thereby stimulating economic activity. While most economists have already declared Canada in recession, the closest Carney had come was last month when he conceded it was a distinct possibility. But since then most economic indicators have been in retreat, including retail sales, auto purchases, housing starts and prices - and most dramatically last month’s 70,600 shrinkage in jobs. The central bank will not publish new projections for the economy until Jan. 22, just days before the next federal budget. But Tuesday’s statement indicates the Bank of Canada expects contraction through the October-December period and at least during the first three months of 2009. The statement does not say how long the bank expects the slump to last but says bold actions by governments and central banks, especially in the United States and Europe, are beginning to loosen up global money markets and support economic growth.

The Stephen Harper government has said it will introduce a stimulus package when it tables a budget on Jan. 27, although it came close to being defeated in Parliament last week over perceived slackness in reacting to the slowdown. The prime minister avoided losing a confidence vote by persuading the Governor General to shut down Parliament. Carney said other factors are helping Canada counter the economic slowdown, including the depreciating loonie which is making exports more competitive.The bank’s next scheduled date for setting interest rates is Jan. 20.