Bank of Canada lowers overnight rate target by 1/4 percentage point to 2 1/4 per cent



    OTTAWA, Oct. 21 /CNW Telbec/ - The Bank of Canada today announced that it
is lowering its target for the overnight rate by one-quarter of a percentage
point to 2 1/4 per cent. The operating band for the overnight rate is
correspondingly lowered, and the Bank Rate is now 2 1/2 per cent.
    Three major interrelated developments are having a profound impact on the
Canadian economy. First, the intensification of the global financial crisis
has led to severe strains in financial markets. The associated need for the
global banking sector to continue to reduce leverage will restrain growth for
some time. Second, the global economy appears to be heading into a mild
recession, led by a U.S. economy already in recession. Third, there have been
sharp declines in many commodity prices. The outlook for growth and inflation
in Canada is now more uncertain than usual.
    Consistent with the G7 Plan of Action, major economies have announced
extraordinary measures to stabilize their financial systems. These initiatives
will be pivotal to resuming the flow of credit to support global economic
growth. Canada's economy and strong financial system will benefit directly
from these actions.
    The weaker outlook for global demand will increase the drag on the
Canadian economy coming from exports. Lower commodity prices will also dampen
the outlook, working through a deterioration in Canada's terms of trade to
moderate domestic demand growth. The marked tightening in Canadian credit
conditions in recent weeks will restrain business and housing investment. The
Bank expects growth to be sluggish through the first quarter of next year,
then to pick up over the rest of 2009 and to accelerate to above-potential
growth in 2010 supported by improving credit conditions, the lagged effects of
monetary policy actions and stronger global growth. The recent sizeable
depreciation of the Canadian dollar will also provide an important offset to
the effects of weaker global demand and lower commodity prices. Overall, the
Bank projects average annual growth in real GDP of 0.6 per cent in both 2008
and 2009, and 3.4 per cent in 2010.
    With excess supply projected to build throughout 2009 and lower assumed
energy prices, inflationary pressures will ease significantly relative to the
projection in the July Monetary Policy Report Update. Core inflation is now
projected to remain below 2 per cent until the end of 2010. Total CPI
inflation should peak during the third quarter of 2008, fall below 1 per cent
in the middle of 2009, and then return to the 2 per cent target by the end of
2010.
    In the face of diminished inflationary pressures, the Bank of Canada
lowered its policy interest rate by 50 basis points on 8 October, acting in
concert with other major central banks. This extraordinary move, combined with
today's announcement, brings the cumulative reduction in our target for the
overnight rate to 75 basis points since the Bank's last fixed announcement
date. These actions provide timely and significant support to the Canadian
economy. The cumulative reduction in the Bank's policy rate since last
December is now 225 basis points.
    In line with the new outlook, some further monetary stimulus will likely
be required to achieve the 2 per cent inflation target over the medium term.
The evolution of the financial crisis, its impact on the global economy and
the timing of the effects of the various extraordinary measures being taken to
address it pose significant risks to the projection on both the upside and the
downside.
    The Bank will publish the details of its new projection for the economy
and inflation, including all the key risks to the projection, in the Monetary
Policy Report on 23 October 2008.

    Information note:

    The Bank of Canada's next scheduled date for announcing the overnight
rate target is 9 December 2008.




For further information:

For further information: Jeremy Harrison, (613) 782-8782


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