RTRS: Bank of Canada cuts rates, to unveil new strategy
The Bank of Canada cut its benchmark interest rate on Tuesday to an historic low of 0.25 percent and made no explicit commitment on taking nonconventional measures to spur the economy even as it predicted a deeper-than-expected recession.
It took the unusual step of providing guidance on rates, saying the overnight rate will stay at 0.25 percent until mid-2010.
"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 in order to achieve the inflation target," the bank said in a statement.
The rate cut took markets by surprise and triggered a fall in the Canadian dollar versus the U.S. dollar to C$1.2499, or 80.01 U.S. cents immediately after the decision, from around C$1.24, or 80.65 U.S. cents. Canadian 3-month Treasury bill yields also fell.
The central bank on Thursday will outline its strategy for possible nonconventional measures such as creating money to buy securities, but its statement on Tuesday gave no indication of its willingness to actually start using those policies now.
"The bank retains considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework to be outlined in the bank's Monetary Policy Report on April 23," it said.
Ten out of 12 primary securities dealers surveyed by Reuters last week had said they expected the central bank to use some form of quantitative or credit easing within the next three months.
The bank outlined a series of technical adjustments it will make to reinforce the new overnight rate and avoid disorder in money markets. These included narrowing its operating band to 25 basis points from 50 basis points and making the overnight rate lower limit of that band as well as significantly increasing the balance in the settlement system.
The bank now sees the Canadian economy contracting 3 percent this year, compared with its projection in January of a 1.2 percent decline. Recovery will be delayed until the fourth quarter, not the third quarter as it previously thought. The bank also revised down its growth forecast for 2010 to 2.5 percent from 3.8 percent, which was widely considered overly optimistic.
It sees total and core inflation staying lower longer, returning to the bank's 2 percent target only in the third quarter of 2011 instead of mid-2011.
