The Bank of Canada today surprised analysts by cutting interest rates 75 basis points. The target for the overnight rate is now 2.75%.

Economists were almost unanimously calling for a 50 bps cut, following the recent cuts in the United States. There was also some sentiment in favour of a 25 bps cut. No one, however, expected 75 bps cut.

The operating band for the overnight rate was also lowered, and the Bank Rate is now 3%.

In its policy statement, the central bank said, “Over the course of the summer, a more pronounced weakening trend in economic activity became evident in Canada and globally. The terrorist attacks of 11 September appear to have exacerbated this trend. As a consequence, levels of economic activity in Canada through the second half of this year and the first half of next year will be further below the economy’s potential output than previously expected.”

It also signaled minimal worry about inflation. “[This lower output] will result in persistent downward pressure on inflation through much of next year. Core inflation, which was 2.3% in September, is now expected to move down below 2% in early 2002. Total CPI inflation, which was 2.6% in September, should also decline below 2% by early 2002, if energy prices remain at or below their early-September levels.”

Today’s cut brings the total reduction in policy interest rates since the beginning of the year to 3%. The Bank says, “It is intended to underpin confidence and provide additional support for domestic demand growth through 2002, consistent with keeping inflation near the Bank’s target of 2% over the medium term. In this environment of exceptional uncertainties about geopolitical developments and business and household confidence, the Bank will continue to monitor economic developments very closely.”