Bank of Canada lowers key policy interest rate by 1/4 percentage point to 2 per cent

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 2 1/4 per cent.

In the November Monetary Policy Report, the Bank indicated that the timing and extent of the recovery in economic activity in Canada this year would depend on geopolitical developments and the pace of the return of consumer and business confidence to normal levels. Since then, uncertainty has been reduced as geopolitical developments have evolved positively and consumer confidence has improved. However, business confidence both in Canada and abroad remains weak.

Although the Canadian economy is expected to gather momentum in the course of this year, it will nonetheless remain in excess supply through 2002, putting downward pressure on inflation. Core inflation, which declined to 1.7 per cent in November, is likely to stay around its current level through mid-2002 and to average just under 1 1/2 per cent in the second half of the year. Total CPI inflation, which fell sharply to 0.7 per cent in November, is expected to remain below the core rate until late 2002.

The interest rate cut announced today brings the cumulative easing in the target for the overnight rate over the past 12 months to 3 3/4 percentage points. This easing, together with the improvement in the overall economic climate, should underpin growth through 2002 and 2003. The outcome would be consistent with returning inflation to its 2 per cent target over the medium term.

Information note

The Monetary Policy Report Update will be published on 23 January 2002, a week earlier than in the past. In future, it will be Bank practice to publish the Monetary Policy Report and the Update one week, rather than two weeks, after a fixed announcement date.
The Bank's next scheduled date for announcing policy interest rates is 5 March 2002.

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