OTTAWA, Sept 3 - The Bank of Canada cut interest rates by 25 basis points to 2.75 percent on Wednesday because of lower-than-expected inflation as well as lagging growth in the third quarter due to multiple economic shocks. "Notwithstanding these developments, there are clear indications that conditions are in place for a strengthening of economic growth," the central bank said in a statement that cited robust final domestic demand, an earlier and stronger than expected U.S. economic rebound and favorable capital markets.
The central bank's move was the second consecutive interest rate cut after a 25 basis point cut July 15 which came after five increases in since mid-January, 2002. Canadian interest rate spreads, which have helped fuel the Canadian dollar's surge this year against the U.S. dollar, narrowed to 1.75 percentage points from 2.00 percentage points over comparable U.S. rates. "Since the bank's last interest rate announcement on 15 July, inflation pressures have continued to ease. Core inflation has declined below the 2 percent inflation target earlier than the bank anticipated, and it appears that lower inflation will persist over the coming months," the central bank added. The Bank of Canada said the deadly SARS outbreak, a single case of mad cow disease, last month's power black out in Ontario and forest fires in Western Canada would likely curb growth below potential in the July-September quarter, after growth was "interrupted" in the April-June quarter.//