As expected, the Bank of Canada is lowering its target for the overnight rate by 25 basis points to 4%, in an effort to prop up a faltering economy. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 4.25%.

With today’s action, the Bank has cut rates a total 175 bps this year. These earlier rate cuts have been accompanied by policy statements indicating hope for a second half rebound. But today the central bank says, “Economic data released since the Bank’s last policy interest rate announcement on July 17 suggest that the pace of growth of the Canadian economy has been slower than expected. In part, this slowing reflects reduced demand from abroad for Canadian manufactured goods and primary products. The most important factor in this regard has been the ongoing weakness in the U.S. economy, particularly in capital spending.” The bank also raises the issue of slower growth outside North America.

“Within Canada, growth in final domestic demand has softened, and the adjustment of inventory levels in some sectors, especially in telecommunications manufacturing, is not as far advanced as had been expected,” it says. “As a consequence of these developments, the Bank now expects economic growth in the third and fourth quarters of this year to be below potential, resulting in a lower level of activity than earlier expected. This implies reduced pressures on production capacity and inflation through the rest of this year and into 2002.”

The Bank of Canada still projects consumer price inflation to fall to about 2% by the end of the year as a result of reduced pressures in product and labour markets. “In these conditions of slower-than-expected growth and associated easing in inflation pressures, today’s interest rate reduction, together with the monetary stimulus already in place, is intended to provide support for domestic demand growth. This is expected to contribute to moving the economy, in the second half of next year, back towards levels of activity consistent with keeping inflation near the Bank’s target of 2%.”

Canada’s central bank also left the door open to further cuts. “Given the continuing uncertainties in the global economy, particularly the timing and strength of the recovery in investment in the United States, as well as uncertainty surrounding domestic demand in Canada, the Bank will continue to monitor developments closely.”

The bank’s next scheduled date for announcing policy interest rates is October 23. In the wake of the rate decrease, the major banks have made announcements dropping their prime lending rates.