The Bank of Canada met analyst expectations with a modest 25 basis point rate cut this morning.

The central bank cut its target for the overnight rate by 25 bps to 4.25%. The operating band for the overnight rate is correspondingly lowered, and the bank rate is now 4.5% per cent.

The bank indicated that the cut comes in response to slower growth in the United States, which is hitting domestic firms, too. ” The slower pace of economic growth in Canada, largely stemming from developments in the United States, continued through the second quarter of 2001. As a result, pressures on production capacity have eased, thus reducing inflation pressures.”

Canada’s central bank also made plenty of noise about the expectation for shrinking inflation. “Core inflation, which is currently a little above 2%, is projected to move down to about 2% in the second half of this year. Total CPI inflation, which has lately been well above the bank’s 1% to 3% inflation-control target range, is expected to fall in the coming months to about 2% by the end of the year. Recent declines in the prices of gasoline, natural gas and crude oil are mitigating the risk that high energy prices earlier this year could more broadly affect Canadian consumer prices.”

In this morning’s announcement, the bank indicated that the outlook remains uncertain, although it is still positive about the likelihood of a second half recovery. “Today’s rate cut brings the total reduction in interest rates by the bank this year to 1.5%. This cumulative reduction will underpin domestic economic growth in the face of weaker-than-anticipated economic conditions outside North America and continuing uncertainty about the timing and strength of the recovery in investment in the United States. The bank continues to expect that the pace of growth in Canada will increase in the second half of 2001, with further gains in 2002. This would be consistent with keeping inflation close to the inflation-control target of 2% through 2002. The bank will remain alert to further developments.”