Bank of Canada announced unsurprisingly this morning that they’re lowering the target for the overnight rate by 0.50% to 1%. Many experts and analysts expected the cut, so it was expected by the market. This means that the BOC has decreased interest rates by 3.5% since Dec ’07, and this is the lowest rates have been since 1958, when it was at 1.12%.

The central bank said that the international economic outlook has worsened since last month’s interest rate decline and it seems to be intensifying and spreading out into the “real” economy, as we’ve seen with the trouble the car manufacturers are in now. This uncertainty is negatively affecting both business and consumer confidence around the world and hurting Canadian demand for goods and services. The fall in energy prices is a result of this weaker demand.

They stated that the global financial system needs to be stabilized before any kind of recovery is possible. The extraordinary actions being taken by global governments are starting to take effect although it will be some time before things return to “normal”.

Other key points include:

Canadian exports are down sharply

domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence

Canada’s economy is projected to further contract through mid-2009, with real GDP dropping by 1.2% this year on an annual average basis

real GDP is expected to rebound, growing by 3.8% in 2010

modest decreases in housing prices should cause core CPI inflation to ease, bottoming at 1.1% in Q4

CPI inflation is expected to dip below zero for two quarters in 2009, reflecting year-on-year drops in energy prices

core inflation should return to the 2% target in the first half of 2011 as the economy returns to potential

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