By Fergal Smith and Kelsey Johnson

TORONTO/OTTAWA (Reuters) – The Bank of Canada slashed its key interest rate for the third time this month to its lowest level in a decade and launched what observers called its first ever quantitative easing program, saying it would buy government and commercial debt.

The central bank unexpectedly cut its overnight interest rate by 50 basis points to 0.25%, its lowest since June 2010, from 0.75%. It was the second surprise cut in two weeks.

“A firefighter has never been criticized for using too much water,” Bank of Canada Governor Stephen Poloz, told reporters shortly after the rate cut.

This week, parliament approved a C$52 billion ($37 billion) financial package to support the economy and Canadians left without work because of the impact of the epidemic.

“We want to make sure that we’ve a great market function and indeed that the economy has a great foundation for growth when activity resumes,” Poloz said.

While Poloz said the bank stands ready to “take further action as required”, he said the central doesn’t at this stage it would be not sensible to think of interest rates going lower than this.

The Canadian dollar weakened to 1.4146 to the U.S. dollar after the bank’s rate cut.

Poloz, who is set to retire in June, said the asset purchase program is aimed at improving the “functionality” in financial markets. He said that the negative interest rates are an available tool, but he did not think they were suitable because they could have negative effects on the financial system.

“Markets were fully expecting the Bank of Canada to cut its key rate by 50 basis points to the prior low of 0.25% at some point, but the Friday morning timing is yet another surprise,” Bank of Montreal Chief Economist Douglas Porter said.

“But beyond that, the bigger news here is the Bank’s decision to take the full plunge into quantitative easing — it’s now official. It’s doubtful that this significantly adjusts the economic outlook, but it should help moderate some of the biggest swings in the government of Canada bonds market,” he added.

The central bank launched the Commercial Paper Purchase Program (CPPP), to help alleviate strains in short-term funding markets. It will begin with purchases of Government of Canada securities C$5 billion per week, across the yield curve.

Poloz said he will not dispute that the central bank’s liquidity measures look like quantitative easing.

“The rate cut was a foregone conclusion .. QE (quantitative easing) was sorely needed and we expect that we will see probably more QE announced within the next quarter. Probably adding CMBs (Canada Mortgage Bonds) to the mix,” Andrew Kelvin, senior rates strategist at TD Securities, said.

“Better late than never,” he added.