Bank of Canada, U.S. Fed cut interest rates by half a point

Central banks including the Bank of Canada and the U.S. Federal Reserve have cut short-term interest rates by half a percentage point in a co-ordinated international action.

The banks said Wednesday morning they are acting to ease "the recent intensification of the financial crisis," in a move that will provide "timely and significant support" to the economy.

The Fed and Bank of Canada joined the Bank of England, the European Central Bank, and the central banks of Sweden and Switzerland in cutting rates, while the Bank of Japan "expresses its strong support."

The banks say inflationary pressures have started to moderate, "partly reflecting a marked decline in energy and other commodity prices." At the same time, the financial-sector meltdown "has augmented the downside risks to growth and thus has diminished further the upside risks to price stability."

The Bank of Canada's target for the overnight rate went down by 0.5 of a percentage point to 2.5 per cent, while the Federal Reserve's key policy rate fell to 1.5 per cent.

With the U.S. and international financial system in disorder, Federal Reserve chair Ben Bernanke and his colleagues resumed a rate-cutting campaign that had been halted in June amid worries about inflation.

'Pace of economic activity has slowed'

Wednesday's move came ahead of the Bank of Canada's regularly scheduled Oct. 21 monetary policy meeting and the Fed's meeting set for Oct. 28-29.

"The pace of economic activity has slowed markedly in recent months," the Fed said.

"Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

The central banks aim to encourage shell-shocked banks, consumers and businesses to borrow, lend and spend more freely.

Crisis having global impact: Bank of Canada

The Bank of Canada's statement noted that "the intensification of the global financial crisis is having a marked impact on all countries. In recent weeks conditions in global financial markets have deteriorated sharply, the U.S. economy has weakened further, and commodity prices have fallen abruptly."

As a result, "credit conditions in Canada have tightened significantly, despite the relative health of our financial institutions."

It noted that weaker growth in the United States and other trading partners will drag on the Canadian economy.

"Below-potential growth in aggregate demand through 2009, combined with a lower profile for commodity prices, will significantly ease inflation pressures in Canada," the bank said.

"Inflation expectations remain well anchored."

It added that it will continue to monitor developments and "the evolution of risks" to determine whether further action is needed.