Bank of Canada cuts rates by 0.75% to 1.5%

Inflation is dead! At least that's what the Bank of Canada is saying by cutting rates by a rare 0.75%. After the cut, the rates will be at 1.5%, which will bring it closer to the US, Britain and several other developed countries.

The Bank of Canada today announced that it is lowering its target for the overnight rate by three-quarters of a percentage point to 1 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 1 3/4 per cent.

The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated. Global financial markets remain severely strained. Measures taken by major governments are beginning to encourage credit flows, although it will take some time before conditions in financial markets normalize. In addition, a series of recently announced monetary and fiscal policy actions will also support global economic growth.

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 recent declines in terms of trade, real income growth, and confidence are prompting more cautious behaviour by households and businesses.

All of these factors imply a lower profile for core inflation than had been projected at the time of the last Monetary Policy Report in October.

The Canadian economy is weakening rapidly and a collapse of the Big Three auto manufacturers in the US will have a severe impact. Although it must be said that the rate cuts seem to be directed more at the financial institutions whose life will get easier as the yield curve steepens.

The downside of the rate cuts include shifting wealth from savers to the financial intermediaries, and further fuelling the real estate boom (it hasn't really corrected much in Canada yet.)