The Bank of Canada cut its key lending rate to a record low, and may leave it unchanged for a year because inflation is persisting below its 2 percent target. The target rate for overnight loans between commercial banks was reduced to 0.25 percent today, the lowest since the central bank was founded in 1934 and the lowest it can go, the bank said. Policy makers also kept the rate on overnight deposits from commercial banks at 0.25 percent, instead of the usual practice that would have reduced it to zero. “Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010,” the central bank said in a statement from Ottawa today. The central bank will provide updates at each future policy decision, starting June 4, on its plans to leave the key rate unchanged. The key rate has reached its “effective lower bound” during a deepening recession that will keep inflation below 2 percent until the third quarter of next year, the bank said. Policy makers said they still have “considerable flexibility” to spur growth, including guidelines for so-called quantitative and credit easing that will be presented in two days. The Canadian dollar fell 0.8 percent to C$1.2491 per U.S. dollar at 9:04 a.m. in Toronto, from C$1.2390 late yesterday. Lower Forecast Canada’s economy will shrink by 3 percent this year, the central bank said, revising a January prediction of a 1.2 percent contraction. Next year, output will expand by 2.5 percent, instead of the earlier forecast of 3.8 percent. The bank said inflation will turn negative and reach a low point of minus 0.8 percent in the third quarter of this year. Inflation won’t return to the 2 percent target until the second half of 2011, the bank said. Bank of Canada Governor Mark Carney is scheduled to announce guidelines on April 23 about quantitative easing, a policy in which a central bank buys government debt to try to revive economic growth. The Bank of Canada today announced several steps to keep the financial system functioning with interest rates close to zero, which can disrupt the operations of money-market funds and banks. Extending Terms Some future term purchase and resale agreements will be extended from terms of as long as three months to lengths of at least a year. Even with a record low overnight rate, the central bank’s April 13 survey of loan officers found those who said credit was more expensive outnumbered those who said it was cheaper by a record 80 percentage points. The world’s eighth-largest economy probably contracted by 5.8 percent in the first three months of this year, the most since 1991, according to a separate Bloomberg economist survey. Consumer confidence is also being eroded because companies have fired more than 2 percent of the country’s workers since October -- a total of 356,600 -- the fastest reduction since 1982. Thirteen of 25 economists surveyed by Bloomberg News predicted no rate cut today, with the other 12 calling for a cut to 0.25 percent.

Source