Canada unexpectedly cut its interest rate by 75 bps to 1.5%

The Bank of Canada surprised markets Tuesday with a deeper-than-expected 75bps cut to its benchmark-lending rate, to 1.5% a 50-year low, as it warned that Canada is entering a recession and global economic conditions are deteriorating at a deeper rate than anticipated. Canada has lowered its key lending rate by a combined 150bps in the span of two months. The last time the bank's key lending rate was this low was in July, 1958.

The Bank of Canada projected core inflation would remain below 2% in both 2009 and 2010. The Bank of Canada sets its benchmark rate to meet a 2% inflation target.

Here is from the New York Times:

The lack of a mortgage and banking crisis in Canada had shielded the country somewhat from the economic downturn. But a dramatic drop in exports to the United States, particularly of automobiles and auto parts, combined with a collapse in energy and commodity prices has brought an end to the country’s isolation.

“While Canada’s economy evolved largely as expected during the summer and early autumn, it is now entering a recession as a result of the weakness in global economic activity,” the Bank of Canada said in its announcement. “The recent declines in terms of trade, real income growth and confidence are prompting more cautious behavior by households and businesses.”

The central bank’s level of concern was highlighted by the extent of Tuesday’s rate cut. Most economists had anticipated half a percentage point.

The announcement may further inflame an economic debate that has created political turmoil in Canada. The Conservative government of Prime Minister Stephen Harper shut down Parliament last week to avoid a vote of no-confidence in an economic program it announced in late November.

Sources :

1. The Financial Post: Bank of Canada cuts rates to 50-year low, December 9, 2008
2. The New York Times: Bank of Canada Cuts Rate to 50-Year Low , December 9, 2008

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