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OTTAWA (Reuters) - The Bank of Canada cut its overnight interest rate by one-quarter point to 4.25 percent on Tuesday, saying it expected global financial market difficulties linked to U.S. subprime woes to persist longer than anticipated.
Shifting to a more pessimistic view than in its October Monetary Policy Report (MPR), the bank said credit conditions globally and in Canada have tightened further and it expects the slowing U.S. economy to suppress demand for Canadian exports. In October, the bank judged credit costs to have tightened by 25 basis points.
The bank appeared to show less concern about the Canadian dollar's strength, noting that it had recently traded closer to the level of 98 U.S. cents assumed in the October MPR. But it said the currency's strength had helped push October inflation lower than the bank expected and inflation should remain lower than forecast.
"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," it said in a statement. When it kept rates unchanged in October, it had said risks were "roughly balanced, with perhaps a slight tilt to the downside."
The bank gave no clue as to whether it was leaning toward another rate cut at its January 22 rate decision or not, saying only that it would assess all developments and the balance of risks at that time.
Reporting by Louise Egan; editing by Randall Palmer