Highlights
The Bank of Canada cut its key interest rate by 25 basis points to 2.25 percent. Although there was little doubt that the Bank of Canada would reduce its key interest rate from 2.5 percent, opinion was split on whether it would be by 25 or 50 basis points. The Bank took part in the coordinated rate cut just two weeks ago on October 8 when the Federal Reserve, Bank of England and European Central Bank among others cut their key interest rates by 50 basis points in an attempt to staunch the credit crunch by increasing liquidity and shoring up confidence in the financial sector.

In cutting its rate for the second time in two week, the Bank cited a slowing domestic economy along with a slower global economy. The Bank hinted that there could be more rate cuts to come. Falling commodity prices and the continuing global financial crisis are hurting the Canadian economy, which the Bank of Canada said is now projected to grow by just 0.6% this year and next, a sharp decline from July's projections, when the central bank forecast 1.0 percent GDP growth this year and 2.3 percent expansion in 2009. In its statement, the Bank said

" 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."