The Bank of Canada announced Tuesday morning that it is lowering its target for the overnight rate by one-quarter of a percentage point to 1/4 per cent. Most economists were predicting that the Bank would stand pat.
In an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the Bank's January Monetary Policy Report Update, with weaker-than-expected activity in all major economies, said the BoC in its accompanying statement
The Bank noted that deteriorating credit conditions have spread quickly through trade, financial, and confidence channels, insisting measures to stabilize the global financial system have taken longer than expected to enact.
As a result, the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009, said the Bank.
The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual. The economy is projected to grow by 2.5 per cent in 2010 and 4.7 per cent in 2011, and to reach its production capacity in the third quarter of 2011.
Given significant restructuring in a number of sectors, potential growth has been revised down. The recovery will be importantly supported by the Bank's accommodative monetary stance.
The Bank expects core inflation to diminish through 2009, gradually returning to the 2 per cent target in the third quarter of 2011 as aggregate supply and demand return to balance. Total CPI inflation is expected to trough at -0.8 per cent in the third quarter of 2009 and return to target in the third quarter of 2011. The Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to its inflation projection are tilted slightly to the downside.
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