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Bank of Canada aggressively trims key interest rate by 0.5% to 3.5%

Blog by | March 16th, 2008

Ottawa, Tuesday Feb 04, 2008 

In an effort to prevent U.S. economic weakness from spilling over into this country, The Bank of Canada announced today a further cut in its key overnight lending rate by half a percentage point to 3.5 per cent.

It's the first time the Bank of Canada has cut its key rate by more than a quarter of a percentage point in more than six years.

"There are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected in January. This stems from further weakening in the residential housing market, which is adversely affecting other sectors of the U.S. economy and contributing to further tightening in credit conditions."  the bank said in a statement

"The deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy."

The move by Canada's central bank was anticipated by many economists in the country. However many thought a quarter-percentage-point cut would be more likely, given that domestic demand in the Canadian economy is still strong. But the central bank said the prospects for Canada's economy have obviously weakened in the last two months.

"The Bank now judges that the balance of risks around its January projection for inflation has clearly shifted to the downside, and, as a result, the Bank is lowering the target for the overnight rate. Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2 per cent inflation target over the medium term." the bank said.

Tuesday's aggressive rate cut was the first policy move presided over by the new Bank of Canada governor, Mark Carney. He took over from David Dodge, who retired at the end of January.

Statistics Canada reported on Monday that the Canadian economy contracted by a weaker-than-expected 0.7 per cent in December. Fourth-quarter growth came in at just 0.8 per cent on an annual basis - the weakest since 2003.

The Canadian dollar quickly fell on news. The loonie fell more than two-thirds of a cent to close at $1.0049 cents US.   

Bank prime rate falls to 5.25% 

Following this announcement, big banks started to match the Bank of Canada's rate cut with a half-percentage point cut in their prime lending rates. TD Bank was the first to lower its prime rate to 5.25 per cent, from 5.75 per cent, effective Wednesday, and other bank are expected to follow.

The prime rate is what banks charge their best customers and serves as a benchmark for a whole range of lending rates for variable mortgages and floating interest rate loans. 

What does this mean for borrowers?

Those with variable-rate mortgages, variable-rate credit cards, and home equity lines of credit will benefit directly – these products are linked to the prime rate.  Fixed-rate mortgages are not as likely to be affected directly by this announcement as their rates are influenced more by movements in the bond market.