The Bank of Canada slashed a key interest rate by three-quarters of a percentage point Tuesday as the central bank moved to combat major economic weakness.

With the interest rate reduction — the biggest drop since one of a similar size in October 2001— the bank's overnight rate now stands at 1.5 per cent, a level not seen since 1958.

"While Canada's economy evolved largely as expected during the summer and early autumn, it is now entering a recession as a result of the weakness in global economic activity," the bank said.

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

Most economists had been expecting a cut of half of a percentage point, although some had been calling for the more aggressive reduction the central bank made.

In the wake of the Bank of Canada's decision, the Canadian dollar fell 0.66 of a cent, closing at 79.08 cents US, after being down close to a cent earlier in the day.

After the central bank's move, TD Bank became the first of the country's big banks to reduce its prime lending rate — what it charges its top customers — although it didn't go for the full reduction of 0.75 of a percentage point. TD dropped its prime rate by a half-point to 3.5 per cent. The other top banks followed suit.

Economists said the central bank may not be done with interest rate cuts, given the weak condition of the economy.

"Canada is only just entering a recession that will likely get worse before it gets better," said TD Bank economist James Marple.

"Given the further deterioration in the outlook for inflation, an additional 50-basis-point cut when the Bank of Canada meets again on Jan. 20 is a reasonable expectation."

Dawn Desjardins, assistant chief economist at Royal Bank, believes the Bank of Canada's key rate will remain at 1.5 per cent, although she said future cuts could be necessary if the economic downturn is protracted.