Posted on Yahoo Tue Mar 3, 12:38 PM
OTTAWA (AFP) - Canada's central bank on Tuesday cut its key lending rate half a percentage point to a record low of 0.5 percent in its latest move to help arrest a deepening economic slump.
The Bank of Canada lowered its overnight rate as part of its ongoing effort to stimulate credit and economic activity. Since December 2007, it has cut its interest rate by four percentage points.
Despite its aggressive cuts, it said fourth quarter economic indicators such as gross domestic product data released on Monday "point to a sharper decline in Canadian economic activity and a larger output gap through the first half of 2009 than projected in January."
Official data Monday showed Canada's gross domestic product dropped 3.4 percent in the fourth quarter of 2008, marking the biggest quarterly decline since 1991.
"The outlook for the global economy has continued to deteriorate" since the bank's last monetary update in January, the central said, "with weaker-than-expected activity in major economies."
Very weak auto and housing sectors in the United States, Canada's biggest trading partner, are "particularly challenging for Canada," the bank noted.
As well, any potential delay in stabilizing the global financial system, as well as the larger-than-anticipated effects of low confidence and dwindling wealth on domestic demand could push a turnaround to early 2010, it said.
In its last report, the Bank of Canada forecast gross domestic product would drop by 1.2 percent this year, before rebounding by 3.8 percent in 2010.
Stabilization of the global financial system remains "a precondition for the global and Canadian economic recoveries," it said.
As well, governments looking to address toxic assets and recapitalize financial institutions must not delay the implementation of their "ambitious plans," it said, adding this is "critical."
"Once the global financial system stabilizes and global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialized economies."
Given its near-zero interest rate, the Bank of Canada said it is "refining the approach if would take to provide additional monetary stimulus, if required, through credit and quantitative easing."
Such an effort would see the central bank buy bonds and other assets in hopes of lowering prices for corporate debt and other risky assets that are much less attractive to investors in these dour economic times.