The Bank of Canada cut its key rate by one-quarter of a percentage point Tuesday, shortly after the U.S. Federal Reserve slashed a key interest rate as global markets plunged for a second day.
In a widely expected move, the lowered its target for the overnight rate to 4 per cent.
"The Bank of Canada did suggest that it's open to cutting rates further, should that be necessary," BNN's Michael Kane said Tuesday after the announcement.
In a statement, the Bank said "further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to return inflation to target over the medium term."
The Bank said the Canadian economy, despite some slowing in growth in the fourth quarter, continues to operate above its production capacity.
A weakening U.S. economy will mean "additional downward pressure on export growth" in Canada, said the statement.
However, the Bank also said that domestic demand in Canada is expected to remain strong.
"Overall, the Bank now projects weaker growth in 2008 than was expected in October, with the economy moving into modest excess supply in the second quarter of this year," said the statement.
"Somewhat stronger growth in 2009 brings the Canadian economy back into balance in early 2010."
Regarding inflation, the bank said core and total inflation will fall below 1.5 per cent by the middle of this year -- below its two per cent target.
The U.S. federal funds rate, the interest that banks charge each other on overnight loans, has been cut to 3.5 per cent -- down three-fourths of a percentage point from 4.25 per cent.
The cut, which comes a week before the scheduled announcement date, comes as a dramatic signal from the Fed.
"They had an emergency meeting last night at which they decided to cut the benchmark lending rate," said Kane.
"Most of the betting was that they were going to move on that rate but by a half a percentage point and that they'd wait until (next week)."
Kane said while the U.S. cut helped lift the European markets it appeared to be sending a message to U.S. investors that the Central Bank was frightened by what's happening in the marketplace.
In early trading Tuesday, U.S. stock markets plunged but in Toronto the S&P/TSX composite index bounced back following Monday's losses.
