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

    OTTAWA, Jan. 20 /CNW Telbec/ - The Bank of Canada today announced that it
is lowering its target for the overnight rate by one-half of a percentage
point to 1 per cent. The operating band for the overnight rate is
correspondingly lowered, and the Bank Rate is now 1 1/4 per cent.
    The outlook for the global economy has deteriorated since the Bank's
December interest rate announcement, with the intensifying financial crisis
spilling over into real economic activity. Heightened uncertainty is
undermining business and household confidence worldwide and further eroding
domestic demand. Major advanced economies, including Canada's, are now in
recession and emerging-market economies are increasingly affected. Energy
prices have fallen as a result of substantially weaker global demand.
    Stabilization of the global financial system is a precondition for
economic recovery. To that end, governments and central banks are taking bold
and concerted policy actions. There are signs that these extraordinary
measures are starting to gain traction, although it will take some time for
financial conditions to normalize. In addition, considerable monetary and
fiscal policy stimulus is being provided worldwide.
    Canadian exports are down sharply, and domestic demand is shrinking as a
result of declines in real income, household wealth, and consumer and business
confidence. Canada's economy is projected to contract through mid-2009, with
real GDP dropping by 1.2 per cent this year on an annual average basis. As
policy actions begin to take hold in Canada and globally, and with support
from the past depreciation of the Canadian dollar, real GDP is expected to
rebound, growing by 3.8 per cent in 2010.
    A wider output gap through 2009 and modest decreases in housing prices
should cause core CPI inflation to ease, bottoming at 1.1 per cent in the
fourth quarter. Total CPI inflation is expected to dip below zero for two
quarters in 2009, reflecting year-on-year drops in energy prices. With
inflation expectations well-anchored, total and core inflation should return
to the 2 per cent target in the first half of 2011 as the economy returns to
    Against this background, the Bank today lowered its policy rate by 50
basis points, bringing the cumulative monetary policy easing to 350 basis
points since December 2007. Guided by Canada's inflation targeting framework,
the Bank will continue to monitor carefully economic and financial
developments in judging to what extent further monetary stimulus will be
required to achieve the 2 per cent target over the medium term. Low, stable,
and predictable inflation is the best contribution monetary policy can make to
long-term economic growth and financial stability.

    Information note:

    A full update of the Bank's outlook for the economy and inflation,
including risks to the projection, will be published in the Monetary Policy
Report Update on 22 January 2009. The next scheduled date for announcing the
overnight rate target is 3 March 2009.

For further information:

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

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