Bank of Canada cuts key rate to record low

The Bank of Canada cut its benchmark overnight rate by half a percentage point Tuesday, bringing the benchmark to just 1 per cent. Globally, economic troubles are mounting while in Canada, economists say, signs point to a recession.

The U.S. Federal Reserve under Chairman Ben Bernanke has already taken the unprecedented step of bringing its key Fed funds rate to a range of 0 per cent to 0.25 per cent. Unemployment in the United States is growing and the picture darkens with each set of data.

Last week, the European Central Bank under Jean-Claude Trichet slashed its key rate for the fourth consecutive month, bringing it to just 2 per cent. Several European economies are suffering deeply from the global slowdown, and economists believe the ECB will continue to bring down interest rates.



In Canada, the central bank is faced with a deteriorating outlook, and has already said the country is entering a recession. It had already brought interest rates to generational lows in a battle against this slowdown, and is expected to continue the fight. At the same time, inflation is not a concern, leaving the Bank of Canada free to flex its muscles.

Canada is still deemed to be in a better position than many other countries. Indeed, unemployment is not projected to reach the heights of the last two recessions in the early 1990s and early 1980s. Still, the country is in the midst of a downturn and the Organization of Economic Cooperation and Development, for example, recently projected a sharp slowdown.



The Bank of Canada is trying to spur lending, as spending by consumers and businesses is key to a recovery. But in its most recent survey of business conditions, it was clear credit is tight. The percentage of companies reporting tighter credit conditions hit a record high in the central bank's quarterly Business Outlook survey, which has been conducted since 1997. Similarly, in its Senior Loan Officer survey, which collects information from major financial institutions, the Bank of Canada found that the cost of loans is increasing as banks seek to pass their own higher costs on to those seeking to borrow.

Similarly, job losses are a concern and the outlook is grim. Canada lost 70,000 jobs in November and more than 34,000 in December. The federal government, which is expected to unveil economic measures in its Jan. 27 budget, has also warned of mounting unemployment.



The sales outlook is also darkening for many Canadian companies.

Amid this deteriorating outlook, economists had believed Mr. Carney could go as far as cutting three-quarters of a percentage point, and some see the central bank still continuing to cut rates at its next policy setting March 3. Another reduction of half a percentage point would bring rates ever closer to zero, with the benchmark at just 0.5 per cent.