Bank of Canada Cuts Lending Rate to 0.5%, Lowest Ever

By Greg Quinn

March 3 (Bloomberg) -- The Bank of Canada cut its benchmark lending rate to a record, and said it may use policies beyond interest rate moves, if needed, to revive an economy hit by a recession and tight credit markets.

Governor Mark Carney cut the target rate on overnight loans between commercial banks to 0.5 percent from 1 percent today, and signaled he may reduce it again. Fifteen of 23 economists surveyed by Bloomberg News predicted today’s rate cut.

“The Bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing,” the Ottawa-based central bank said in a statement. Details of how such a plan would be used will be released in April with a new economic forecast, the bank said.

Carney’s view of so-called quantitative easing has changed from January when he said it was a “highly unlikely, remote situation,” because the country’s banks were among the world’s strongest through the biggest global financial crisis in decades. Canada is being pulled into a recession as global demand for its automobiles and lumber plunges and prices fall for the commodities it produces.

Canada’s economy will shrink faster than predicted in January, the Bank of Canada said today. The world’s eighth- largest economy shrank at a 3.4 percent annualized pace in the fourth quarter, Statistics Canada reported yesterday, the most since 1991.

Canada’s dollar was unchanged at C$1.2934 against the U.S. dollar at 9:10 a.m. in Toronto.

‘Or Lower’

“The target for the overnight rate can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up,” the bank said.

Canada’s decision comes two days before the European Central Bank and the Bank of England are also expected to cut their key interest rates to new lows. ECB President Jean-Claude Trichet signaled policy makers may pare their benchmark rate to a record low of 1.5 percent March 5 as a recession in the euro region deepens. The Bank of England cut its policy rate to 1 percent this year, the lowest since it was founded in 1694, and economists expect the rate to fall to 0.5 percent this week.

The U.S. Federal Reserve has reduced its benchmark to a range of between zero and 0.25 percent on Dec. 16.

Job Losses

Carney has cut the central bank’s policy rate from 4 percent since taking over in February 2008.

“Those who have an expectation that things are going to recover dramatically and quickly as we come out of this, that’s less and less likely all the time,” Royal Bank of Canada Chief Executive Officer Gordon Nixon told reporters Feb. 26.

Statistics Canada has reported a record job loss of 129,000 in January, and the agency’s leading economic indicator fell the most since 1982 in January. Bankruptcies in December also jumped 47 percent from a year earlier.

Business executives say they’re struggling with the tightest credit climate since at least 2001, according to a Bank of Canada survey released Jan. 12.

Carney has said the Bank of Canada has already injected as much as C$41 billion into financial markets to spur lending, sought wider legal power to fix markets and accepted new types of collateral. The federal government is also buying up to C$125 billion of mortgages to give banks more cash to use for new loans.

Quantitative easing is designed to leave banks with so much free cash that they stop hoarding and expand lending. It can involve a central bank buying securities and creating money to pay for them. A central bank can also try buying up securities to drive down longer-term market interest rates, extending efforts to keep short-term rates low with their benchmark rates.

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