The Bank of Canada cut its key overnight interest rate 25 basis points on Tuesday to 2.50 percent, as many analysts expected, because the soaring domestic currency meant growth was weaker than projected.
The lower rate of growth, coupled with underlying price pressures, also prompted the central bank to say inflation would likely persist below the mid-point of its 1-3 percent target "late into 2005," compared to mid-2005 as it had said during most of last year.
The rate is now 150 basis points above comparable U.S. Fed funds rate, further reducing the premium on Canadian investments that drove last year's unprecedented rise in the domestic currency -- a phenomenon the bank blamed for weaker exports. Canada cut rates in September and July after two hikes earlier in 2003.
"Despite stronger global economic growth, the rapid appreciation of the Canadian dollar against the U.S. currency has cut into the overall growth of aggregate demand for Canadian goods and services through weaker exports and increased imports," the bank said in a statement.
Fourth quarter growth, which the bank last month had projected to be well above 4 percent, appeared to be weaker than expected and would mean overall 2003 growth would be smaller, it said.