Tuesday, March 04, 2008

Prime Rate cut One Half Percent Bank of Canada to 3.5 per cent

Bank of Canada slashes interest rates half a point to 3.5 per cent

From the Canadian Press, OTTAWA The Bank of Canada has slashed its key short-term interest rate by half a percentage point to 3.5 per cent in an attempt to bolster Canada's flagging economy.

And the central bank signalled that further cuts to its overnight rate may be required soon, possibly as early as its next scheduled date of April 22.

The cut was the third in as many months, but the first time the central bank has moved so boldly on interest rates since the aftermath of the September 2001 terror attacks.

Tuesday's action was the first under new Bank of Canada governor Mark Carney, who took over the central bank's top post on Feb. 1 from David Dodge.

In its statement, the bank cited worsening economic conditions in the U.S., which have shown up in weaker Canadian exports.

The bank said the American slump is likely to be deeper and more prolonged than previously forecast, and prospects for the Canadian economy have darkened.

Text of the Bank of Canada statement Tuesday as the central bank cut its key overnight interest rate by half a percentage point to 3.5 per cent:

Information received since the January Monetary Policy Report Update (MPRU) indicates that economic growth in Canada through the four quarters of 2007 was broadly in line with expectations. Domestic demand has remained buoyant, as rising commodity prices and high employment have continued to support income growth. Canada's net exports weakened further in the fourth quarter, reflecting the slowing U.S. economy and the impact of the past appreciation of the Canadian dollar. Overall, the Canadian economy remained above its production capacity at year-end. Core and total CPI inflation at 1.4 per cent and 2.2 per cent, respectively, in January u have also been consistent with the Bank's expectations.

At the same time, there are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected in January. This stems from further weakening in the residential housing market, which is adversely affecting other sectors of the U.S. economy and contributing to further tightening in credit conditions. The deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy. These developments suggest that important downside risks to Canada's economic outlook that were identified in the MPRU are materializing and, in some respects, intensifying.

The Bank now judges that the balance of risks around its January projection for inflation has clearly shifted to the downside, and, as a result, the Bank is lowering the target for the overnight rate. Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the two per cent inflation target over the medium term.


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