As widely predicted by economists, the Bank of Canada has cut the overnight bank rate by 25 basis points to 2.5%. Economists are now debating the prospects for further rate moves.

BMO Nesbitt Burns says that the Bank’s accompanying press release was even more dovish than expected, leaving the coast clear for a follow-up move in early March, unless domestic growth soon recovers.

“Overall, it’s not that a meagre quarter point rate cut will lift the clouds on a clear blue sky, but this morning’s cut coupled with indications of an easing bias at least acknowledges a number of critical areas of uncertainty that have crept into the outlook over recent weeks,” RBC Financial offers.

“There were two key points from the press release: core inflation will stay below 2% late into 2005 ; and, the output gap is larger than expected, because domestic demand was weaker than expected in Q4,” Nesbitt notes. It also points out that the Bank made a direct point that the strong Canadian dollar is cutting into growth.

TD Bank predicts that this morning’s interest-rate cut will not be the last this year. “The Bank will need to pull the trigger again in March to offset the ongoing drag from the loonie’s strength,” it says. “For one, with the export sector visibly struggling… the stronger dollar will likely continue to weigh on the inflation picture… and, finally, while the loonie’s flight may have stalled, it is only a matter of time before the currency takes off again, eventually climbing above the 80 U.S. cent threshold.”

“Canadian GDP growth failed to live up to the Bank’s robust expectations in Q4, so there’s more economic slack than the Bank expected. With inflation below 2%, officials believe that there is little inflation risk from rate cuts. Unless GDP now accelerates well above the 4% hurdle, or inflation surprises further to the high side, the Bank is leaving the door wide open for another rate trim in March,” Nesbitt concludes.

The Bank’s next scheduled date for announcing the overnight rate target is March 2.