Canada Cuts Rate to 1%

The Bank of Canada slashed its key interest rate to the lowest since the institution was founded in 1934 and signaled that more cuts may be needed to jolt the economy out of recession and stabilize credit markets., Bloomberg 1/20/2009 6:39:55 AM

Governor Mark Carney cut the target rate on overnight loans between commercial banks by half a point to 1 percent, lower than the previous record of 1.12 percent in 1958, when the rate was based on treasury-bill yields. The move was anticipated by 19 of 20 economists surveyed by Bloomberg News.

Canada’s move mimics efforts in the U.S., the U.K. and Japan to revive lending as credit markets reel from about $1 trillion of write-offs and losses. The collapse of financial firms such as Lehman Brothers Holdings Inc. and Fortis contributed to the worst global downturn since the Great Depression and helped push Canada into a recession for the first time since 1992.

The economy will shrink through the middle of 2009 for an annual decline of 1.2 percent, the central bank said, scrapping an October prediction for an expansion of 0.6 percent. Canada’s inflation rate will be negative for two quarters this year due to lower energy prices, and policy makers said it won’t return to their 2 percent target until the first half of 2011.

The financial crisis has driven up banks’ borrowing costs and forced them to raise new capital. That in turn has made them reluctant to extend credit to consumers and businesses.

Bank of Canada officials and Finance Minister Jim Flaherty have said the country’s banks, rated the soundest last year by the World Economic Forum, have scope to expand lending.

Canada Cuts Rate to 1%