The Bank of Canada unexpectedly cut its key interest rate today by three-quarters of a percentage point to a 50-year low of 1.50 per cent and declared the Canadian economy to be in a recession.
"While Canada's economy evolved largely as expected during the summer and early autumn, it is now entering a recession as a result of the weakness in global economic activity," the bank said in a statement.
"The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated," it added.
The last time Canada's central bank cut its overnight lending target rates this sharply was in October 2001 following the September 11th attacks in the United States.
Eleven of Canada's 12 primary securities dealers had predicted the bank would cut rates by a half-point and only one had forecast a three-quarters point cut. Canada has now lowered its rates by 3 full percentage points since December 2007.
Unlike previous statements, the bank did not explicitly signal further cuts were necessary but it appeared to leave the door open to additional easing in 2009.
"The bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required," it said.
Canada has a couple of factors working in its favour, it said. A depreciation of the Canadian dollar will offset some of the impact of the global recession and ongoing and significant liquidity provision has led to improvements in money markets and overall credit conditions.
Core inflation, which excludes volatile items and is used to guide monetary policy, is now expected to drop lower than the bank projected in October, it said.