In a widely expected move, the Bank of Canada stepped up and cut interest rates for the second time this year Tuesday morning.
The cut reduces the central bank's key overnight lending rate to 2.25 per cent from 2.5 per cent, narrowing the gap with the U.S. Federal Reserve's benchmark rate of one per cent.
In January the Bank of Canada began the New Year with a rate cut of a quarter of a percentage point.
The reduction in the key rate, which banks charge each other for overnight loans, will trickle through the retail banking market and reduce prime lending and mortgage rates.
The Bank of Canada cut rates in January to offset the impact of a strong loonie on Canada's battered manufacturing and export sectors, as well as weaker domestic demand.
The latest cut follows Statistics Canada's fourth-quarter gross domestic product report issued last Friday. Even though the economy enjoyed its strongest gain in six quarters in the final three months of 2003, there was still evidence that consumer spending and final domestic demand remains weak.
Statscan reported that gross domestic product, the broadest measure of economic activity, gained by 3.8 per cent in the fourth quarter. For the year as a whole, the nation's economy grew by a tepid 1.7 per cent. That was in keeping with expectations, but only half the growth rate enjoyed in 2002.
BoC officials have emphasized several times in recent months that strong domestic demand is vital to the recovery of the economy from the trials of 2003.
"While external demand has been slightly stronger and final domestic demand in Canada slightly weaker than expected, the bank's outlook remains, on balance, unchanged," the BoC said in a statement that explained the rate cut.
"Today's decision to provide some additional monetary stimulus was taken to support aggregate demand and to return inflation to the target by the end of 2005."
The bank added that the performance of the economy since its rate cut on Jan. 20 has been "broadly consistent" with the economic outlook that it provided in January.
The bank's forecast for 2004 is for GDP growth of 2.75 per cent and for annual inflation rate to climb up to the target range of two per cent by the end of 2005.
At this point, only time will tell if the Bank of Canada sees a need for a third rate cut in its next policy announcement in April, analysts say.
