The Bank of Canada is lowering its target for the overnight rate by 25 basis points to 0.25%, “which the bank judges to be the effective lower bound for that rate,” the bank said Tuesday.

Economists had expected the benchmark rate to remain unchanged at 0.5%.

To reinforce its conditional commitment to maintain the overnight rate at 0.25%, the Bank of Canada will roll over a portion of its existing stock of one- and three-month term Purchase and Resale Agreements (PRAs) into six- and 12-month terms at minimum and maximum bid rates that correspond to the target rate and the Bank Rate, respectively. These longer-term PRAs will be issued according to the schedule released Tuesday.

The central bank said the global recession has intensified since January’s Monetary Policy Report Update, with weaker-than-expected activity in all major economies.

“As a result, the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3% in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual,” it said.

The economy is projected to grow by 2.5% in 2010 and 4.7% in 2011, and to reach its production capacity in the third quarter of 2011.

“The recovery will be importantly supported by the Bank’s accommodative monetary stance,” the central bank said.

Tuesday’s decision to lower the policy rate by 25 basis points brings the cumulative monetary policy easing to 425 basis points since December 2007.

“It is the Bank’s judgment that this cumulative easing, together with the conditional commitment, is the appropriate policy stance to move the economy back to full production capacity and to achieve the 2% inflation target,” the bank said.

The Bank of Canada releases its Monetary Policy Report on Thursday.

The bank will make its next interest rate announcement on June 4.

In the wake of the central bank’s decision to cut lending rates, Canada’s major banks quickly moved to lower their prime rates by one-quarter of a percentage point to 2.25%.

The Canadian dollar weakened versus the U.S. dollar following the rate cut announcement.

The loonie slipped to US79.98¢, down from US80.74¢, at Monday’s close.

IE