Bank of Canada lowers key policy interest rate by 1/4 percentage point to 4 per cent

The Bank of Canada today announced that it is lowering its target for the overnight rate 1 by one-quarter of one percentage point to 4 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 4 1/4 per cent. With today's action, the total reduction in interest rates by the Bank this year amounts to 1 3/4 percentage points.

Economic data released since the Bank's last policy interest rate announcement on 17 July 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. As well, economic growth outside North America has slowed significantly. 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.

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.

In July, total CPI inflation fell sharply to 2.6 per cent, largely because of declines in gasoline and natural gas prices. While core inflation increased slightly, to 2.4 per cent, the Bank still projects consumer price inflation to fall to about 2 per cent 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 per cent. 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.

Information note:

The Bank's next scheduled date for announcing policy interest rates is 23 October 2001.