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.

In announcing today’s cuts, the banks said they took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

The Bank of Canada is lowering its target for the overnight rate by 50 basis points to 2.5%. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 2.75%.

“This significant action will provide timely support for the Canadian economy,” Federal Finance Minister Jim Flaherty said in a statement this morning.

Canada’s banks moved to lower their lending rates following the Bank of Canada’s announcement, but reduced their prime interest rate by just one-quarter of a percentage point.

In the United States, the Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1.5%.

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. In a related action, the Fed also unanimously approved a 50-basis-point decrease in the discount rate to 1.75%.

“Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,” the Fed said in a release.

“Some easing of global monetary conditions is therefore warranted,” it added.

TD Economics applauded the action, calling it necessary. “An easing in monetary policy was called for, and it was needed on a global basis,” said Craig Alexander, vice-president and deputy chief economist at TD Economics.

He said he expects both the Fed and the Bank of Canada to cut rates by a further 50 basis points in their upcoming regularly scheduled monetary policy announcements on Oct. 29 and Oct. 21, respectively.

Flaherty is set to meet with fellow G7 finance ministers in Washington on Friday, where he said he would aim to make further progress on a co-ordinated agenda to address the financial crisis.

“I welcome the strong international co-ordination that central banks have displayed throughout the financial crisis, most clearly expressed in the co-ordinated rate cut today. The same commitment to co-operation needs to be reflected by Finance Ministers,” Flaherty said in a statement.

Specifically, he said he would push for accelerated implementation of the recommendations of the Financial Stability Forum, including a central clearing mechanism for over-the-counter credit derivatives, accounting and disclosure standards for off-balance-sheet activities and related risks, and a set of international principles for deposit insurance.

IE