March 3 (Bloomberg) -- The Bank of Canada cut its benchmark lending rate to the lowest ever, and said it is preparing to use policies beyond interest rate moves if needed to revive an economy hit by a recession and tight credit markets.

Governor Mark Carney cut the target rate on overnight loans between commercial banks to 0.5 percent from 1 percent today, and signaled he may reduce it again. Fifteen of 23 economists surveyed by Bloomberg News predicted today’s rate cut.

“The bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing,” the central bank said in a statement.

Details of how such a plan would be used will be released April 23 with a new economic forecast, the bank said.

Carney’s view of using policies beyond interest rates has changed from January, when he referred to them as part of the bank’s “contingency planning” for “highly unlikely, remote situations.” Now, Canada is being pulled into a recession as global demand for its automobiles and lumber plunges and prices fall for the commodities it produces.

“They are getting to the point where rate cuts have very little impact,” said Warren Jestin, chief economist at Bank of Nova Scotia. “The first quarter has been a brutal realization for many central banks that their economies continue to deteriorate, and in some cases at an accelerating rate.”

Shrinking Faster

Canada’s economy will shrink faster than predicted in January, the Bank of Canada said today. The world’s eighth- largest economy shrank at a 3.4 percent annualized pace in the fourth quarter, the most since 1991 and faster than the Bank of Canada’s forecast of 2.3 percent.

Canada’s dollar was little changed at C$1.2932 against the U.S. dollar at 4:25 p.m. in Toronto. The yield on the two-year government bond fell eight basis points, or 0.08 percentage point, to 0.97 percent. The price of the 2.75 percent security due in December 2010 rose 14 cents to C$103.05.

“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. Supply may not begin to be taken up “until early 2010,” the statement said.

Efforts in the U.S. and other countries to fix markets and boost economic growth are a “precondition” for Canada’s recovery, the bank said. A delayed global rebound may depress Canadian inflation, the statement said. The Bank of Canada aims to keep inflation at 2 percent and has said it will remain below that target until the first half of 2011.

Aggressive Direct Action

The Bank of Canada may cut the benchmark rate to 0.25 percent or to zero, Jestin said. Those moves need to be enhanced with more aggressive direct action in credit markets, he said.

Canada’s decision comes two days before the European Central Bank and the Bank of England are also expected to cut their key interest rates to new lows. ECB President Jean-Claude Trichet signaled policy makers may pare their benchmark rate to a record low of 1.5 percent March 5 as a recession in the euro region deepens. The Bank of England cut its policy rate to 1 percent last month, the lowest since it was founded in 1694, and economists expect the rate to fall to 0.5 percent this week.

The U.S. Federal Reserve reduced its benchmark to a range of between zero and 0.25 percent on Dec. 16.

Carney has cut the central bank’s policy rate from 4 percent since taking over in February 2008.

Record Job Losses

“Those who have an expectation that things are going to recover dramatically and quickly as we come out of this, that’s less and less likely all the time,” Royal Bank of Canada Chief Executive Officer Gordon Nixon told reporters Feb. 26.

Statistics Canada has reported a record job loss of 129,000 in January, and the agency’s leading economic indicator fell the most since 1982 in January. Bankruptcies in December also jumped 47 percent from a year earlier.

Business executives say they’re struggling with the tightest credit climate since at least 2001, according to a Bank of Canada survey released Jan. 12.

The Bank of Canada has already injected as much as C$41 billion into financial markets to spur lending, sought wider legal power to fix markets and accepted new types of collateral. The federal government is also buying up to C$125 billion of mortgages to give banks more cash to use for new loans.

Quantitative easing is designed to leave banks with so much free cash that they stop hoarding and expand lending. It can involve a central bank buying securities and creating money to pay for them. A central bank can also try buying up securities to drive down longer-term market interest rates, extending efforts to keep short-term rates low with their benchmark rates.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

Last Updated: March 3, 2009 16:46 EST