The Bank of Canada is lowering its target for the overnight rate by one-half of a percentage point to 0.5%, the central bank said Tuesday.

The cut was widely expected by Bay Street economists.

The operating band for the overnight rate is correspondingly lowered, and the bank rate is now 0.75%, the Bank of Canada said.

“Consistent with returning total [consumer price index] inflation to 2%, the target for the overnight rate can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up,” the bank said in the press release explaining its decision.

The bank has now reduced interest rates by four percentage points since it commenced the latest cycle of easing in December 2007.

The rate cut comes one day after Statistics Canada said the economy contracted at an annualized rate of 3.4% in the last three months of 2008.

The bank added that it will refine the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing, given the low level of the target for the overnight rate.

RBC Economics Research economists said this indicates the bank’s nervousness that the typical policy tools will not be sufficient to put the economy back on a solid growth path.

“The inclusion of the reference to quantitative and credit easing indicates that the Bank is keeping its options open as it works to nurse the economy back to health,” said RBC Economics Research assistant chief economist Dawn Desjardins.

RBC expects the combination of fiscal and monetary policy stimulus to drive positive GDP growth later this year.

Major banks began cutting their prime lending rate almost by half a percentage point, to 2.5%.

The next scheduled date for announcing the overnight rate target is April 21.

A full update of the bank’s outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report on April 23.

IE