Highlights
As expected, the Bank of Canada once again lowered its key interest rate by 50 basis points to 3.5 percent. The Bank previously had reduced rates both at their December 2007 and January 2008 meetings. The Bank had lowered rates amid signs that the U.S., the destination for about 80 percent of Canada's exports could slide into recession. And yesterday's GDP numbers showed that the economy grew at the slowest pace since 2003 in the fourth quarter and contracted in December thanks to declining exports. The Bank of Canada has an inflation target range of 1 percent to 3 percent but focuses on the 2 percent midpoint. While the overall CPI was up 2.2 percent on the year in January, the core or 'operational' CPI that is used by the Bank and excludes eight volatile items was up 1.4 percent. Manufacturing industries were particularly hard hit by the soaring Canadian currency which has cut severely into exports. At the same time the currency has made imports cheaper while shopping trips to the U.S. have replaced domestic purchases.

In its statement, the Bank said


"The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of one percentage point to 3 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 3 3/4 per cent.

"Information received since the January Monetary Policy Report Update (MPRU) indicates that economic growth in Canada through the four quarters of 2007 was broadly in line with expectations. Domestic demand has remained buoyant, as rising commodity prices and high employment have continued to support income growth. Canada's net exports weakened further in the fourth quarter, reflecting the slowing U.S. economy and the impact of the past appreciation of the Canadian dollar. Overall, the Canadian economy remained above its production capacity at year-end. Core and total CPI inflation - at 1.4 per cent and 2.2 per cent, respectively, in January - have also been consistent with the Bank's expectations.

"At the same time, there are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected in January. This stems from further weakening in the residential housing market, which is adversely affecting other sectors of the U.S. economy and contributing to further tightening in credit conditions. The deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy. These developments suggest that important downside risks to Canada's economic outlook that were identified in the MPRU are materializing and, in some respects, intensifying.

"The Bank now judges that the balance of risks around its January projection for inflation has clearly shifted to the downside, and, as a result, the Bank is lowering the target for the overnight rate. Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2 per cent inflation target over the medium term.

"The Bank will publish a new projection for the economy and inflation, including risks to the projection, in the Monetary Policy Report on 24 April 2008."