The Bank of Canada's dramatic chop to the overnight rate was the largest since October 2001 in the aftermath of the 9-11 terrorist attacks.

The bank said dramatic action was needed given the rapidly deteriorating global economy and the impact of the financial crisis and plummeting commodity prices.

"The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated," it said in a statement accompanying the decision.

"While Canada's economy evolved largely as expected during the summer and early autumn, it is now entering a recession," it added.

"The recent declines in terms of trade, real income growth, and confidence are prompting more cautious behaviour by households and businesses."

Although most private-sector analysts had predicted a half-point cut, Scotia Capital economist Derek Holt praised the central bank for exceeding expectations and rising to the needs of the economy.

Given the "dovish" tone of the bank statement, Holt said Canadians should expect another half-point cut at the next scheduled rate decision date on Jan. 20. He said it is possible the overnight rate - the rate banks charge each other on one-day loans - will fall below one per cent by late winter.

Beforehand, they were criticized for not being aggressive enough but now they have come around," Holt said.

While most economists have already declared Canada in recession, Tuesday's statement was the first in which the Bank of Canada was unequivocal on the call. The closest governor Mark Carney had come previously was last month when he said recession was a distinct possibility.

But since then reality has bit hard. The vast majority of economic indicators have been in retreat, including retail sales, auto purchases, housing starts and prices, commodity prices - and dramatically - last month's 70,600 shrinkage in jobs.

The central bank's move was partly a "catch-up" after it did not cut rates more deeply in October, and was urgently needed because of the lack of economy-boosting spending by the Conservative federal government, commented IHS Global Insight economist Dale Orr.

"Today the cry for fiscal stimulus for Canada is loud and clear," Orr wrote.

"Instead of examining what the government could do to stimulate the economy facing such difficult times, the government opted to try to present a balanced budget."

Prime Minister Stephen Harper and Finance Minister Jim Flaherty have said they will present a stimulus package in the budget scheduled for Jan. 27.
Opposition parties were prepared to defeat the government over its perceived inaction, forcing Harper to persuade the Governor General to shut down Parliament until late January.

Given the lag time needed to get major infrastructure projects started, Holt said it was essential for the Bank of Canada to show leadership because Ottawa's stimulus -when it comes - may not impact the economy for another year.

Lower interest rates, if passed on by the commercial banks, encourage businesses and households to borrow for expansion and consumption.

The central bank will not publish new projections for the economy until Jan. 22, just days before the next federal budget.

In its new outlook, IHS Global Insight projects the Canadian economy will shrink 0.4 per cent in 2009 and full recovery would not occur until late 2010.