Bank of Canada Cuts Lending Rate to Lowest Since 1958

By Greg Quinn

Dec. 9 (Bloomberg) -- The Bank of Canada lowered its benchmark interest rate by more than anticipated to a half- century low and signaled more action may be needed as economic growth sputters amid a “broader and deeper” global slump.

Governor Mark Carney and his rate-setting panel slashed the target rate for overnight loans between commercial banks by three-quarters of a point to 1.5 percent, the lowest since 1958. Two of 23 economists surveyed by Bloomberg predicted the move, with 20 calling for a half-point cut and one calling for a quarter point.

Canada’s economy “is now entering a recession,” the central bank said in a statement from Ottawa today, the first time it has made that assessment outright. “The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required.”

Since Carney said Nov. 19 that a recession was a possibility, reports have shown employment fell by 70,600 in November and housing starts on an annualized basis plunged 19 percent. Meanwhile, manufacturers such as General Motors Corp. are scaling back operations in Ontario, Canada’s industrial heartland, and lower commodity prices are paring investment in the western province of Alberta’s oil fields.

One More?

“They are indicating that if the economic data warrants it they are prepared to move further, but they would need to see a worsening of economic conditions,” said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto, the country’s biggest lender.

The Canadian dollar weakened 1.6 percent to C$1.2708 per U.S. dollar at 9:17 a.m. in Toronto from C$1.2504 late yesterday.

The European Central Bank trimmed its main rate by three- quarters of a point to 2.5 percent on Dec. 4, the biggest reduction in its 10-year history. The Bank of England that day chopped its rate by one percentage point to 2 percent. Canada’s decision comes a week before the U.S. Federal Reserve’s next meeting, followed by the Bank of Japan two days later.

Carney’s rate cut today was the Bank of Canada’s biggest since October 2001. He had already surprised economists with his decisions four times this year including twice in October.

Canada’s rate was 4.5 percent at the start of last December. Policy makers haven’t cut the rate below their 2 percent inflation target since that benchmark was established in 1993.

Global Recession

The International Monetary Fund sees recessions next year in the U.S., Japan and the euro area, and economists in a separate Bloomberg survey say Canada will follow suit.

Economic growth will shrink at a 1.2 percent annualized pace for the October-through-December period and at a 0.5 percent rate in the first quarter of 2009, according to the median of 10 estimates gathered by Bloomberg News Nov. 6-12.

The Bank of Canada today didn’t lay out a detailed growth forecast. Policy makers said waning expansion means their measure of so-called core inflation will be slower than they predicted in an October report. The central bank said then that inflation excluding eight volatile items would slow to a 1.6 percent year-over-year pace in the second half of 2009.

Canada sends three-quarters of its exports to the U.S., where a global credit squeeze spurred by the subprime mortgage meltdown is sapping demand for shipments of automobiles and lumber.

‘Nervousness’

Still, signs of weakness have spread beyond exports to the domestic spending that propped up the economy for much of this decade.

“There certainly is a nervousness,” George Fraser, president of Fraser & Hoyt, a company offering insurance and travel services, said in Pictou, Nova Scotia. “People aren’t going to be spending the way we have.”

Before the drops in employment and housing starts, home sales fell 14 percent in October from September, the biggest 1- month decline since 1994.

Canadian banks, rated the soundest in the world by the World Economic Forum, are reluctant to lend after the worst financial malaise since the Great Depression toppled institutions such as Lehman Brothers Holdings Inc. in the U.S. and Fortis in Europe.

The Bank of Canada stimulus comes as government aid for the economy is on hold until Parliament re-opens in January. Prime Minister Stephen Harper last week “prorogued” or shut down the country’s legislature for seven weeks in a bid to stave off a challenge from opposition parties seeking to bring down his government. The opposition proposed to form a coalition government to speed up an economic stimulus package.

The record low for Canada’s key rate was 1.12 percent in 1958, a time when it was based on treasury yields rather than actions by policy makers.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.