As expected, the Bank of Canada lowered its target for the overnight rate by 25 basis points to 2%.

The last time the overnight rate was that low was in January 2002 when central bankers around the world reacted to the terrorist attacks of Sept. 11, 2001. Before that, the overnight rate hadn’t dipped so low since September 1960.

“The Canadian economy continues to adjust to developments in the global economy,” said the bank in a news release. “These include stronger world demand, higher commodity prices, the realignment of world currencies, including the Canadian dollar, and the intensified competition, together with the new trading opportunities, coming from emerging-market economies. These developments require shifts in activity among sectors and create a need for adjustments by many businesses. Monetary policy is facilitating these adjustments by supporting aggregate demand, with the goal of keeping the economy near its full potential and inflation on target.”

The rate cut followed a pair of weak economic reports, including a rise in the March unemployment rate to 7.5 per cent.

The economy shed about 13,300 jobs last month, when economists had been looking for an increase of 15,000 jobs and had expected the unemployment rate to hold steady at 7.4 per cent.

The poor employment report followed a January decline in gross domestic product of 0.1 per cent.

The Bank of Canada said the economy is projected to return close to its production potential by the third quarter of 2005 and core inflation is projected to move back to the 2% target by the end of 2005.

The bank will provide more details on the state of the economy on April 15 when it unveils its latest monetary policy update.

That report will likely stand by the 2004 growth prediction but may shave next year’s bullish call for 3.75% growth slightly.

The next interest rate decision is set for June 8, but many economists don’t see the bank reducing rates again. The say the central bank’s accompanying policy statement suggests that rates will remain low for some time, as the Bank of Canada has shifted into neutral on further rate moves.

BMO Nesbitt Burns says that there was one key nugget in the final paragraph of today’s press release: “The risks to the outlook now appear balanced.” “Essentially, this is about as clear a signal that the Bank could send that it has officially shifted into neutral, and it will now take a big surprise on the growth/inflation front to prompt them to cut again. This is a stronger statement than most were expecting,” Nesbitt says.

TD Bank says today’s cut is the central bank’s last one. “The Bank’’s statement left little doubt in our minds that barring a full-fledged collapse of the Canadian economy – which is not in the cards – another ease in June is not in the offing.”

“At this stage, it appears that the central bank will remain on hold for the better part of 2004. However, we are also sticking to our call that the Bank will be nudging rates higher towards the end of this year,” TD concludes.

National Bank Financial calls today’s rate decision “an extra insurance policy” for the recovery. However, it complains that the Bank, “was far too short on explanations in its press release.”