Since the October Monetary Policy Report, three developments have led the Bank of Canada to modify its outlook for economic growth and inflation in Canada. First, economic activity in the rest of the world, especially in the United States, has been stronger than expected. Second, the U.S. dollar has continued its sharp depreciation against major world currencies, including the Canadian dollar, largely as a result of global economic imbalances. Third, downward revisions to Canadian GDP data in the first half of 2003 and lower than-expected growth in the third and fourth quarters mean that the amount of economic slack was somewhat larger at the end of 2003 than projected by the Bank in its October Report.

Weighing these developments and their likely persistence, the Bank lowered its projection for output over the next year and a half and concluded that additional monetary stimulus would be required to support aggregate demand and return inflation to 2 per cent over the medium term. Thus, on 20 January, the Bank lowered its target for the overnight interest rate by 25 basis points to 2 1/2 per cent (Chart 1).