BoC drops interest rate to record lows

OTTAWA — The Bank of Canada says the recession will be deeper and longer than previously thought because governments around the world have failed to get stimulus money into the global economy quickly enough.

To help fight the downturn the bank cut interest rates today to a new record low of 0.25% from 0.50% and took the unprecedented step of promising to keep rates low until the end of June next year.

“The recession in Canada will be deeper than anticipated, with the economy predicted to contract by 3.0% in 2009,” the bank said in a statement. “The bank now expects the recovery to be delayed ... and to be more gradual.”

The bank said the turnaround would not come until the end of this year and the Canadian economy would not be at full capacity until mid 2011.

In its optimistic January report the bank said the economy would only shrink by 1.2% this year. It also said the rebound would be quick and Canadians could expect growth of 3.8% next year, but that prediction has also been revised down to 2.5%.

The bank did manage to slip some positive news into its statement today predicting the economy would be growing by 4.7% by the end of 2011. But it’s a prediction TD Bank’s chief economist Don Drummond says will also likely have to be downgraded eventually.

The bank’s change of heart since January has raised questions among some opposition critics over how the Bank of Canada’s governor, Mark Carney, could have got it so wrong.

“We’re quite concerned with Mark Carney’s flip-flop,” said NDP finance critic Thomas Mulcair. “The Governor of the Bank of Canada has to be a very steady hand on the tiller and we’re very concerned that he’s backing away from his previous rosy predictions.”

Speaking to reporters in Jamaica Prime Minister Stephen Harper said he understood the bank’s concerns but remained confident his stimulus package would eventually work.

“We continue to get different assessments of where the Canadian economy is headed over the next two years,” Harper said. “We will continue to examine the situation, particularly the employment situation, and we will make adjustments where necessary.”

Canada’s top economists say the climb-down from the bank’s rosy January predictions are an indication that a consensus is emerging on just how grim this recession could prove to be.

“We’re bouncing along bottom right now,” said Warren Jestin, chief economist for Scotiabank. “There is no comparison with the 1990s, the 1980s or parts of the 1950s. This is an entirely different scenario. We have seen the upside of globalization and now we’re seeing its ugly twin.”