By Julian Beltrame, The Canadian Press
OTTAWA - The Bank of Canada trimmed its trendsetting interest rate by a quarter percentage point Tuesday, saying Canada needs the stimulus to ward off the headwinds from a global recession.
The reduction, following a surprise 50 basis point reduction two weeks ago, drops the overnight interest rate to 2.25 per cent, a hair above the record low two per cent level reached in 2004.
But the bank's failure to chop by at least half-a-point left economists disappointed given the gloomy prospects for the Canadian economy.
"The entire statement was written in a remarkably dovish way as if to justify a 50-or 75-point cut and they fell short on execution," said Scotia Capital economist Derek Holt.
"I think they should have stepped more firmly in front of the problems ahead and cut more aggressively."
With the economy sharply slowing, Canada's central bank did hint that it may have to cut further at the next scheduled announcement in December.
Bank governor Mark Carney characterized the headwinds hitting Canada from deteriorating global conditions as "profound" and now projects the economy will only advance 0.6 per cent this year and by the same amount in 2009.
That's as close to a recession as possible without actually falling into one and sharply lower than the bank's July forecast, which was for a one per cent advance this year and relatively robust 2.3 per cent growth in 2009.
The central bank now says Canada won't emerge from the malaise until 2010, when it predicts growth will rebound to 3.4 per cent.
"The weaker outlook for global demand will increase the drag on the Canadian economy coming from exports," the bank stated.
"Lower commodity prices will also dampen the outlook, working through a deterioration in Canada's terms of trade to moderate domestic demand growth."
As well, the bank said "tightening in Canadian credit conditions in recent weeks will restrain business and housing investment."
In Toronto, the main stock index fell Tuesday as a lower crude price depressed the TSX energy sector, lower bullion prices pushed down gold stocks and most of the bank stocks fell.
The Canadian dollar was down 1.05 cents to 82.72 cents US at midmorning.
Carney surprised some observers by declaring that the U.S. is already in recession - something Washington has only hinted at - and that the global economy is heading there.
Given the gloomy outlook, labour economist Erin Weir of the United Steelworkers union said there was no reason for Carney's cautious monetary policy.
He added that the federal government has a role to play through its fiscal policy.
"The Government of Canada should rebuild the country's infrastructure, enhance employment insurance benefits, and invest more in other public priorities," he said.
"Fiscal policy can stimulate the economy regardless of whether chartered banks are willing to reduce borrowing costs or of whether households and businesses choose to borrow from them."
When the Bank of Canada cut its key rates by half a point on Oct. 8, banks initially balked at dropping their prime rate by the full amount until the federal government agreed to inject more liquidity into the system by buying up mortgages on their books.
But inter-bank funding rates have eased somewhat since and Tuesday's more modest quarter-point cut is expected to make it easier for chartered banks to follow through this time.
The central bank noted Tuesday that not all recent developments have been bad for Canada's economy.
Positive factors include the recent slide in the value of the Canadian dollar, which will make exporters more competitive in the global market, and efforts by major economies to bail out their banking sectors and stabilize financial systems.
BMO economist Michael Gregory said it may have been the uncertainty about how all the factors will impact on Canada that convinced Carney to take a more cautious approach.
But most economists said Tuesday's action increased the chances of another cut on Dec. 9, the next time the bank is scheduled to set interest rates.
The Bank of Canada's principal objective in adjusting interest rates is to keep Canada's inflation rate within a one-to-three per cent range, and as close to the two per cent target as possible.
It now says inflation has ceased to be a significant problem.
Although the consumer price index remains slightly elevated above three per cent, the bank said excess supply will bring price increases down to about one per cent by the middle of 2009 before returning to close to the target by the end of 2010.
"In line with the new outlook, some further monetary stimulus will likely be required to achieve the two per cent inflation target over the medium term," the bank said.
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