Bank of Canada lowers overnight rate target by 1/4 percentage point to 4 1/4 per cent

    OTTAWA, Dec. 4 /CNW Telbec/ - The Bank of Canada today announced that it
is lowering its target for the overnight rate by one-quarter of one percentage
point to 4 1/4 per cent. The operating band for the overnight rate is
correspondingly lowered, and the Bank Rate is now 4 1/2 per cent.
    Since the October Monetary Policy Report (MPR), there have been a number
of economic and financial developments that have a bearing on the prospects
for output and inflation in Canada.
    Consistent with the outlook in the MPR, the global economic expansion has
remained robust and commodity prices have continued to be strong. The Canadian
economy has been growing broadly in line with the Bank's expectations,
reflecting in large part underlying strength in domestic demand. However, both
total CPI inflation and core inflation in October, at 2.4 per cent and
1.8 per cent respectively, were below the Bank's expectations, reflecting
increased competitive pressures related to the level of the Canadian dollar.
The Bank now expects inflation over the next several months to be lower than
was projected in the MPR. In the context of exceptional volatility in global
financial markets, the Canadian dollar spiked well above parity with the U.S.
dollar in November, but it has recently traded closer to the 98-cent-U.S.
level assumed in the October MPR.
    Overall, the Canadian economy continues to operate above its production
capacity. Given the strength of domestic demand and weak productivity growth,
there continue to be upside risks to the Bank's inflation projection.
    However, other developments since October suggest that the downside risks
to the Bank's inflation projection have increased. Global financial market
difficulties related to the valuation of structured products and anticipated
losses on U.S. sub-prime mortgages have worsened since mid-October, and are
expected to persist for a longer period of time. In these circumstances, bank
funding costs have increased globally and in Canada, and credit conditions
have tightened further. There is an increased risk to the prospects for demand
for Canadian exports as the outlook for the U.S. economy, and in particular
the U.S. housing sector, has weakened.
    All these factors considered, the Bank judges that there has been a shift
to the downside in the balance of risks around its October projection for
inflation through 2009. In light of this shift, the Bank has decided to lower
the target for the overnight rate. At its next interest rate decision in
January, the Bank will assess all economic and financial developments and the
balance of risks. A full projection for the economy and inflation will be
published in the Monetary Policy Report Update on 24 January 2008.

    Information note:

    The Bank of Canada's next scheduled date for announcing the overnight
rate target is 22 January 2008.

For further information:

For further information: Jeremy Harrison, (613) 782-8782

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