(CEP News) - Canadian fixed income pared its gains after a smaller-than-expected rate cut from the Bank of Canada. The Canadian dollar also slumped as the central bank hinted it may continue to lower rates and said the global economy appears headed for a recession. The Bank of Canada sliced another 25 basis points from its key overnight lending rate target, lowering it to 2.25% on Tuesday, citing a slowing domestic and global economy. The bank also said that "some further monetary stimulus will likely be required," its usual phrase that signals more rate cuts to come. The decision weighed on the Canadian dollar, which was down nearly a cent ahead of the decision. Afterwards, the loonie briefly fell to a three-year low. Canadian 2-year yields were lower prior to the decision, but rebounded into positive territory afterwards. The majority of economists were calling for a 50 basis point cut and markets had priced in the likelihood as well. Yields on two-year Canadian government bonds are down 3.0 bps to 2.17%, with five-year yields down 8.1 bps to 2.80%, 10-year yields down 4.7 bps to 3.67% and 30-year yields down 2.3 bps to 4.20%. The December 08 BAX contract is down 3.5 ticks to 97.71. The bank's statement was downcast. It said the global economy appears to be headed into mild recession, led by a U.S. economy which is already there. "The statement was heavy on economic risks to Canada, with the Bank lowering its outlook for growth and inflation until mid-2009, where it expects things to re-accelerate," said Andrew Pyle, wealth adviser at ScotiaMcLeod. "It has left the door open to additional rate cuts."

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