The Bank of Canada cut its main interest rate to a record low on Tuesday and signalled for the first time that it may take extra steps to pump money into a system that remains stubbornly short of credit. The central bank reduced its key overnight rate by a half point to 0.5 percent, as expected, for a cumulative reduction of 400 basis points since December 2007.
As the rate approaches zero, it began preparing markets for its next step, which could involve printing money to buy securities in the market to drive down longer-term interest rates and help banks expand their lending. This is known as quantitative easing.
It also did not close the door to an additional rate cut to 0.25 percent. "Given the low level of the target for the overnight rate, the bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing," it said in a statement. But the Canadian central bank said it would not outline the framework for any such action until after its April 23 monetary policy report, two days after its next scheduled rate decision.
"It's sort of the nuclear option," said Eric Lascelles chief economics and rates strategist at TD Securities. "They refuse to rule out the possibility of more rate cutting and they seem to be very seriously thinking about quantitative easing ... it suggests the Bank of Canada is very serious about this situation and it recognises it's probably been a little too optimistic recently in terms of the outlook," he said.
The Canadian dollar fell after the announcement and at 10:10 am (1510 GMT) was at around C$1.2896 to the US dollar, or 77.54 US cents, down from C$1.2845, or 77.86 US cents, before. The Bank of Canada, like other central banks, is running out of ammunition to tackle the deepening recession as its benchmark rate approaches zero.
Governor Mark Carney said in January that the bank had a contingency plan in place, if required, and that it has studied steps taken by the US Federal Reserve and in Japan, and their applicability to Canada. The bank said its key rate "can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up."
The country's major commercial banks acted almost in lock-step with the central bank, immediately cutting their prime rates by 50 basis points. The banks have taken heavy criticism for dawdling after past rate cuts or in some cases, failing to pass on the full rate reduction to their customers.
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