Bank of Canada Cuts Policy Rate by 75 Basis Points

The Bank of Canada cut the overnight rate by 75 basis points to 1.50%, more than the consensus forecast for a 50 basis-point ease. The Bank highlighted that the global economic backdrop "has deteriorated significantly" and that financial markets "remain severely strained". The Bank also acknowledged that Canada's economy "is now entering a recession" and that the core inflation rate is likely to be lower than policymakers expected in October.

Today's 75 basis point cut combined with the cumulative 75 basis points of easing in October "provide timely and significant support to the Canadian economy," the Bank said. However, today's statement still leaves the door open to further cuts, although there is no commitment to do so as the Bank will "monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent inflation target over the medium term."

Against a backdrop of the deep global recession, the outlook for Canada's economy has been downgraded, with the Bank now looking for a recession as "recent declines in terms of trade, real income growth, and confidence are prompting more cautious behavior by households and businesses."

However the tone in today's statement hints of some confidence that the accommodative level of monetary policy and liquidity provisions will be sufficient for the Canada's economy to emerge from the current economic slowdown. The Bank said that these policy actions are having some impact on easing pressures in Canada's credit markets.

Still, policymakers did not close the door to providing support through additional rate cuts. While the large 300 basis points of interest rate cuts since late 2007 plus past and expected future fiscal stimulus and the recent depreciation of the Canadian dollar will not prevent a recession, the powerful cocktail of measures is expected to limit the extent of the decline in activity, with RBC forecasting that growth rates will return to the positive column by mid-2009. While we think today's message is that the Bank will hold the overnight rate at 1.50%, should these factors prove insufficient and a more protracted downturn ensues, further interest rate cuts cannot be ruled out in the months ahead.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.