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UPDATE 2-Bank of Canada hints at more rate cuts to come

(Adds details, comments from audience Q&A in paragraphs 4-7)

TORONTO, Jan 8 (Reuters) - The Bank of Canada hinted on Thursday that it would continue to lower interest rates this year but gave no indication of how deep the cuts would be as the global recession hits the Canadian economy.

Deputy Governor Pierre Duguay said the bank continued to monitor developments in world markets to decide its next moves, amid market expectations of a rate cut on Jan. 20.

“We will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 percent inflation target over the medium term,” Duguay said in a speech to the Risk Management Association in Toronto.

Responding to an audience question after his speech, Duguay declined to give a specific outlook on the Canadian economy, noting that the central bank is still working on its Monetary Policy Report update and its views will be updated there. The report is due two days after the next rate decision.

He also said the bank is always looking at contingency plans, and with recently expanded powers during the global financial crisis, it is providing additional term liquidity as long as conditions warrant.

“That’s partly why in reinventing central banking in the last few months we’ve been expanding our range of operations, doing operations that we had not done before...,” Duguay said.

“We’re always looking for, in a sense preparing for, the worst.”

Duguay said the Canadian economy is now in a recession, a result of the deeper than expected global downturn and severely strained financial markets.

The domestic economy’s recovery will be helped by the depreciation of the currency and the 1.5 percentage point reduction in the bank’s key overnight lending target since last October, he said.

Markets widely expect another rate cut in January but are divided over how big the reduction will be, with some expecting a quarter percentage point cut and others a half point.

The overnight lending rate, at 1.5 percent, is already at a 50-year low.

Duguay’s comments largely repeated those in the bank’s Dec. 9 rate announcement. The rest of his speech outlined ways to best manage risk in the financial system. (Additional reporting by Ka Yan Ng in Toronto and Louise Egan in Ottawa; editing by Rob Wilson)

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