The Bank of Canada announced that its key lending rate would be reduced by 1/4 of a percentage point to 4% to try and keep a sluggish US economy from affecting Canada. The cut was expected by the markets and was the second reduction in the past month.
The Bank of Canada signalled that additional rate cuts were likely soon.
"Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to return inflation to target over the medium term," the bank said in a statement.
Dawn Desjardins, a senior economist at Royal Bank, said Tuesday's Bank of Canada announcement points to additional rate cuts ahead, especially if the U.S. economy remains under downward pressure.
"Our baseline forecast is that the [Bank of Canada] will lower the overnight rate by another 50 basis points during the next couple of meetings with the risk of more aggressive rate cuts if the U.S. situation continues to deteriorate," she said.
The Bank of Canada said the 2008 outlook for the U.S. economy is now "significantly weaker" than it was when the bank issued its last monetary policy report in October.
"For Canada, the effects of the weaker U.S. economic outlook will lead to additional downward pressure on export growth," it said, but added that domestic demand in Canada is likely to "remain strong," despite the problems in global credit markets.
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