The Bank of Canada slashed its key interest rate by three quarters of a percentage point to 1.5 per cent this morning, and said Canada has entered a recession.
The Tuesday announcement reduces the benchmark lending rate to its lowest level since 1958.
Shortly after the Bank of Canada announcement on Tuesday, TD Canada Trust announced it was lowering its prime lending rate by 50 basis points, to 3.5 per cent, with the change set to kick in Wednesday.
"It's an aggressive cut," said BNN's Michael Kane, of the central bank's rate cut.
"It should provide stimulation and as a matter of fact the central banks have been saying that. But it still gives them room to maneuver."
Most of the other major banks followed suit with a similar half-point cut to their prime rates, which sets the benchmark for various loans including mortgages.
Scotiabank, CIBC, RBC Royal Bank and BMO Bank of Montreal all announced a drop in their lending rates from 4 to 3.5 per cent, starting Wednesday.
It marks the first time since the global economic slowdown began that the central bank has unequivocally stated that Canada is in a recession.
"While Canada's economy evolved largely as expected during the summer and early autumn, it is now entering a recession as a result of the weakness in global economic activity," said a statement from the Bank of Canada.
"The recent declines in terms of trade, real income growth, and confidence are prompting more cautious behaviour by households and businesses."
The statement added that the outlook for the world economy has worsened and the current global recession is expected to be "broader and deeper" than anticipated.
However, the lower Canadian dollar is one factor that has helped offset the negative effect, making Canadian products cheaper on the global market, the bank said.
The statement also pointed to the possibility of further interest rate cuts, and said measures taken by major governments around the world are beginning to thaw frozen credit systems.
Last week the European central bank cut its lending rate by three quarters of a percentage point, and the Bank of England slashed its rate by one full percentage point.
The U.S. central bank has also dropped its benchmark lending rate by one per cent, and some economists have called on Bank of Canada governor Mark Carney to follow suit.
The Bank of Canada's next update on the economy and inflation will be delivered on Jan 22, just before an expected Federal budget.
Kane said there was evidence of a further slowdown in consumer spending. Sony announced it has been selling flat screen TVs at a loss and will move to outsource manufacturing, sell assets, pull back on investments and lay off thousands of workers.
