Canada's central bank cut its overnight interest rate to 0.5 per cent on Tuesday, in yet another attempt to stimulate the country's sluggish economy.

The record-low rate cut, the seventh in the last year, was widely expected by economists.

"Consistent with returning total (consumer price index) inflation to 2 per cent, 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," Bank of Canada governor Mark Carney said in a statement.

Canada's commercial banks followed the rate cut by dropping their own prime rates by a half-percentage point to 2.5 per cent -- a change that will take effect on Wednesday.

The central bank's rate cut comes a day after Statistics Canada released dismal numbers that prove Canada is in a deep recession.

The Statistics Canada report indicated that Canada's economy shrank by 3.4 per cent in the last quarter of 2008.

That is the biggest decline since the recession of 1991 and sparked a significant drop in the markets on Monday. Toronto's S&P/TSX composite index fell 435.51 points, or 5.36 per cent, to 7,687.51, its lowest point since 2003.

Ignatieff asks PM to define position on economy

The precise state of the economy continues to be a topic of debate in Ottawa.

On Tuesday afternoon, Liberal Leader Michael Ignatieff asked the prime minister to define exactly what the Canadian economy is going through.

"Canadians deserve a clear message from their prime minister about this economic crisis," Ignatieff said, when speaking to the House of Commons.

"Sometimes he says we're in a recession, sometimes it's a depression, in September it wasn't even going to happen at all. This weekend on CNN, the prime minister called it a 'cyclical downturn,' but nothing that requires government intervention.'"

In response, Prime Minister Stephen Harper said his quotes regarding government intervention had been taken out of context by the Liberal leader.

"If the honourable member will look closely at the transcript of that interview, he will see that I was speaking specifically of the mortgage sector," Harper said.

When pressed to define the challenges facing the economy as a recession, depression or cyclical downturn, Harper said "the economic plan of the minister of finance has spoken very clearly about the government's views on this and our action plan to deal with it."

Rate cut impact may take time

While rate cuts are designed to have a stimulative effect on the economy, most experts believe the cut will have a minimal impact.

The central bank has cut its rate from 4.5 per cent 15 months ago to 0.5 per cent, to little effect.

Peter Drake of Fidelity Investments said it could take 12 to 18 months for interest rate cuts to take effect, which means Tuesday's announcement won't provide immediate relief.

Drake said that a cut to the main interest rate will hopefully ripple through the spectrum of interest rates and therefore stimulate the economy.

"The idea is that it will influence other rates, the rates at which banks lend to people and to commercial customers and indeed to each other," Drake told CTV Newsnet.

In his statement, Carney also seemed to back away from his January economic outlook report, which suggested that Canada's economy would begin to recover in late 2009.

He had predicted that the economy would start growing by an annualized two per cent in the third quarter of 2009 and record an average growth of 3.8 per cent in 2010.

Critics had suggested that the January outlook from the bank governor was too rosy.

"I think he miscalculated a little bit with how bad things are in the U.S. and when they might start making the turn," John Stephenson, senior vice president of First Asset Investment Management, told CTV News.

On Tuesday, Carney acknowledged that economies around the world are performing more poorly than anticipated, and said the Canadian economy will likely decline more sharply in early 2009 than previously predicted.

He now suggests the recession could last until 2010.

Carney also said it is possible that the central bank may provide additional stimulus, if necessary, by purchasing credit and other assets.

However, the central bank will not offer details on such plans until its April Monetary Policy Report.

With a report by CTV's Robert Fife and files from The Canadian Press