The Bank of Canada has cut its key overnight rate by half a percentage point.

The rate falls to 3.5 per cent from four per cent. The last announcement on the rate came on Jan. 22. The central bank cut the rate by a quarter-point, or 25 basis points, at that time.

The bank feels domestic demand remains strong but there are risks to the economy, mainly from the slowdown in the United States, BNN's Michael Kane told Newsnet on Tuesday.

In a news release, the bank noted that net exports fell in the fourth quarter, a development driven by the U.S. slowdown and the rising Canadian dollar.

The U.S.'s problems stem "from further weakening in the residential housing market, which is adversely affecting other sectors of the U.S. economy and contributing to further tightening in credit conditions," it said.

"The deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy."

The bank said both core and Consumer Price Index measures of inflation, at 1.4 per cent and 2.2 per cent respectively, were within the bank's expectations.

The bank will make its next interest rate announcement on April 22.

In late morning trading on the TSX, the S&P/TSX composite index was down 159 points to 13,385.

Home-buying decisions

Interest rates significantly affects home-buying decisions. Tuesday's announcement comes as fewer Canadians are contemplating buying a home in the next two years, finds a study conducted for the Royal Bank.

"Overall intentions to purchase a home have dropped by five percentage points to 23 per cent," said a news release issued Tuesday.

"The intensity to buy has also decreased with those very likely to buy slipping from nine per cent in 2007 to seven per cent in 2008, the lowest level since the survey was started 15 years ago."

However, Royal Bank's vice-president, Home Equity Financing Catherine Adams said Canadians still strongly believe that home ownership is a good investment.

"It's merely the degree of optimism which is down from last year," she said.

Some findings:

  • Percentage of those who would buy now rather than wait until next year: 58 per cent, down 6 points from 2007
  • Percentage of those who expect housing prices to rise: 56 per cent, down 3 points from 2007
  • Percentage who think mortgage rates will be higher: 46, up 3 points
  • Percentage who think mortgage rates will be lower: 23 per cent, up 7 points

Fixed-rate mortgages are the preferred choice for both potential buyers and current homeowners.

Adams said the average mortgage amount left to pay is unchanged from 2007, and the intended down payment amount has rise this year.

Those factors "further suggest we continue to have a healthy housing market," added Ms. Adams, with no evidence of a U.S.-style housing crunch developing here.

Across Canada, purchasing intentions are down, with the exception of Quebec. Alberta's market, which has been red-hot, shows signs of cooling. The percentage of Albertans who are very likely to purchase a home has fallen by four points from 2007.

The polling firm Ipsos Reid conducted the study for RBC.

The online survey had a sample size of 3,023 adults. Results are considered accurate within plus or minus 1.8 percentage points, 19 times out of 20.

In late January, RBC released a study suggesting home affordability would improve in 2008.