The Bank of Canada cut its key interest rate on Tuesday by a half-point to a fresh 50-year low of 1 percent, as expected, and predicted a period of falling prices this year as an economic recession takes hold.

The central bank signaled that further cuts may be on the horizon, saying it would judge carefully "to what extent further monetary stimulus will be required."

It has now lowered its overnight rate by 350 basis points since December 2007, bringing it to lows comparable to July 1958 when its key policy tool was called the Bank Rate.

A recession in Canada will last through mid-2009, with the economy shrinking 1.2 percent on average this year before rebounding with 3.8 percent growth in 2010, the bank predicted. The bank sees three consecutive quarters of economic contraction, starting with the fourth quarter of 2008.

"Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence," it said.

The past slide in global energy prices will push Canada's inflation rate below zero percent in the second and third quarters of this year for the first time since 1994, when tobacco taxes were cut.

Core inflation, which excludes volatile items such as gasoline and is considered the best gage of underlying price trends, is expected to bottom at 1.1 percent in the fourth quarter.

But the bank said price expectations in Canada were "well-anchored" and sees both inflation measures creeping back up to its 2 percent target in the first half of 2011.

It said the global economic outlook had deteriorated in the past month but extraordinary measures by governments and central bankers globally were starting to gain traction.

Stabilization of the financial system is a precondition for global economic recovery, it said, adding that it would take "some time" for markets to normalize.

Global conditions will dictate the bank's next move, it hinted. The move on Tuesday was anticipated by 11 of Canada's 12 primary securities dealers in a survey last Thursday. When asked about the central bank's rate decision in March, half the dealers thought it would leave rates unchanged; four expected a half-point cut and two expected a quarter-point cut.