Bank of Canada cuts interest rates

The Bank of Canada, along with the U.S. Federal Reserve, European Central Bank and others, announced an interest rate cut of 50 basis points Wednesday. The Bank of Canada’s benchmark lending rate now stands at 2.5 per cent.

The U.S. Fed cut its benchmark rate by a half point to 1.5 per cent, while the European Central Bank and central banks in the U.K., Sweden and Switzerland are also reducing rates.

The Bank of Canada said deteriorating credit conditions, weaker demand and the drop in commodity prices will “significantly” ease inflation pressures in Canada. “The intensification of the global financial crisis is having a marked impact on all countries,” the bank said in a statement, saying credit conditions in Canada have tightened significantly in recent weeks, and that slowing consumer spending and business investment will pull economic growth lower.

“Central banks are further lowering forecasts for economic growth and inflation due to intensifying fallout from the global credit crunch,” said CREA Chief Economist Gregory Klump. “Had the U.S. Federal Reserve acted alone in cutting U.S. interest rates, the Canadian dollar would have appreciated. The coordination of a surprise cut in interest rates prevented the Canadian dollar from rising. A higher Canadian dollar would have dragged Canadian exports lower at a time when global demand for them is dropping.”

Japan supported the global effort, but did not cut its benchmark rate, which already stands at 0.5 per cent.

China also announced an interest rate cut, the country’s second in three weeks. Hong Kong cut its rates by 100 basis points. The moves in China and Hong Kong were not part of the officially coordinated effort.

The central bank sets its interest rates with an eye at keeping inflation at 2 per cent. The bank said it would continue to monitor carefully economic and financial developments in determining whether “further action” is necessary.

The Bank of Canada’s decision to join the other central banks in a coordinated rate cut suggests credit conditions in Canada have deteriorated rapidly. In a speech less than two weeks ago in Montreal, the Bank of Canada governor, Mark Carney, said there were “few signs” that Canadian banks were restricting the availability of credit to households.

“There is no evidence at this point that our corporations are facing unusual credit conditions,” he told a business luncheon in Montreal on Sept. 25.

The Bank of Canada’s governors are scheduled to release their next interest rate decision on Oct. 21. [CREA 08/10/08]

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