Tue Apr. 21 2009 13:49:50
CTV.ca News Staff
The Bank of Canada cut its key overnight interest rate by a quarter point Tuesday to 0.25 per cent and said the recession will be "deeper than anticipated."
The new rate will stay in place until mid-2010 as long as inflation remains low, the bank said in a statement.
"This is the lowest since the Bank of Canada was founded in 1934 and it's the lowest it can go," BNN's Michael Kane reported Tuesday.
The bank said the global recession has intensified since January, with weaker-than-expected activity in all major economies.
"Deteriorating credit conditions have spread quickly through trade, financial, and confidence channels," said the statement.
"While more aggressive monetary and fiscal policy actions are underway across the G20, measures to stabilize the global financial system have taken longer than expected to enact.
"As a result, the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009."
Following Tuesday's announcement, the chartered banks quickly followed suit.
BMO Bank of Montreal, RBC Royal Bank and CIBC announced their prime rate will drop from 2.5 per cent to 2.25 per cent on Wednesday.
Other banks are also expected to cut their rates.
Ahead of Tuesday's announcement, analysts had been split on whether the bank would slash interest rates.
Eric Lascelles, chief economics and rates strategist for TD Securities, said the central bank has now exhausted its ability to stimulate the economy through its key lending rate.
"Here we are, a record low, we can't go any lower." he told CTV Newsnet Tuesday. "It looks like the Bank of Canada, on this front, is done."
However, Lascelles added that the central bank still has a few arrows in its quiver to stimulate the economy.
"They're not completely out of ammunition," he said, pointing to the likely announcement later this week of "quantitative easing" policies.
Essentially, he said the practice entails the central bank "printing money" in order to buy up financial products like corporate bonds, which will in turn lower the cost for corporations to raise money.
Still, Lascelles said that bankers around the world are scaling back their predictions of economic recovery and warning that the recession will last longer than many had previously hoped.
"When you do that math, no matter how optimistic you are, you are talking about a time frame of years before things like the unemployment rate (are) back down to historically normal levels," he said.
Lascelles predicted that a full recovery may not arrive until the latter half of 2011.
"It's a long time coming, I'm afraid."
Avery Shenfeld, chief economist at CIBC World Markets, said the rate cut will not help the economy.
"A further cut to a quarter-point overnight rate would be futile on its own, and would squeeze margins in the banking system," Shenfeld said in a note Monday.
Meanwhile, the Bank of Canada is set to release its Monetary Policy Report on Thursday.
With files from The Canadian Press