The Bank of Canada has chopped the key lending rate by half a percentage point, dropping it down to three per cent.
In its three previous announcements going back to December, the central bank had cut its overnight lending rate to commercial banks by a total of one percentage point (100 basis points).
Canada has been worried about a possible economic slowdown as a result of problems in the U.S. economy, triggered in part by problems in the financial sector driven by the subprime mortgage crisis.
The troubles have led to a "credit crunch," meaning U.S. businesses -- and to a lesser extent, Canadian ones -- have had trouble accessing credit.
The main job of the central bank, however, is to control inflation. Canada's inflation rate in March was 1.4 per cent, which is within the bank's target rate of two per cent.
The bank said inflation should remain below target throughout 2008 and 2009.
However, the bank made that prediction in part because it expects a soft economy, with solid growth not returning until 2010. It predicted Canada's economy will only grow by 1.4 per cent this year.
"The Bank is now projecting a deeper and more protracted slowdown in the U.S. economy," it wrote Tuesday.
"This has direct consequences for the Canadian economic outlook, with declining exports projected to exert a significant drag on growth in 2008."
Domestic demand is expected to remain strong, supported by commodity prices, high employment levels and the easing of interest rates.
"A gradual recovery in the U.S. economy, a return to more normal credit conditions, and accommodative monetary policy should generate above-potential growth and bring the economy back into balance around mid-2010," it said.
The bank will make its next interest rate announcement on June 10, but will offer a full economic analysis on Thursday.
"Given the cumulative reduction in the target for the overnight rate of 150 basis points since December, the timing of any further monetary stimulus will depend on the evolution of the global economy and domestic demand, and their impact on inflation in Canada," it said.
