BOC Cut Interest Rate To 0.5%. Unconventional Easing Will Be The Next Step

Inline with market expectation, the Bank of Canada lowered interest rate by 50 bps to 0.5%. Governor Mark Carney stated the overnight rate can be expected at or below current level unless there are clear signs showing that excess supply in the economy is absorbed.

Data released since the meeting in January have shown further weakness in the nation's economy. Consumer price index eased to 1.1% yoy in January from the peak of +3.5% in August 2008. Current account turned to a deficit of CAD7.5B in 4Q08 from a surplus of CAD3.6B in the previous quarter. GDP contracted 3.4% qoq in 4Q08, the sharpest quarterly declined since 1991 as driven by slumps in consumer spending, investments and exports.

Seeing the rapid deterioration in economy, the BOC decided to slash interest rates further and believed the impact of the cumulative 350 bps reduction in interest rate since 2008 as well as other monetary and fiscal policies will be felt in 2H09 and throughout 2010.

In contrast with the meeting in January during which the Governor commented quantitative easing was 'highly unlikely', the central bank this time said unconventional easing policies will be adopted if they are needed to boost economic growth. In the accompanying statement, the BOC promised a framework for credit and quantitative easing will be outlined in the April Monetary Policy Report.