The Bank of Canada cut its interest rate by half a percentage point to 3.5 percent on Tuesday and indicated further cuts will be needed to deal with a deteriorating U.S. economy.
The Canadian central bank said the U.S. economic woes will have "significant spillover effects on the global economy."
The bank said further cuts to its overnight rate may be required soon, possibly as early as its next scheduled date of April 22.
"There are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected in January," the bank said in a statement.
"This stems from further weakening in the residential housing market, which is adversely affecting other sectors of the U.S. economy and contributing to further tightening in credit conditions."
It said the downside risks to Canada's economic outlook "are materializing and, in some respects, intensifying."
About 75 percent of Canada's exports go to the U.S., Canada's largest trading partner.
It's the first policy move for Mark Carney, a former Goldman Sachs executive who took over the central bank's top post on Feb. 1 from David Dodge.
The central bank last reduced borrowing costs by a half point in November 2001 _ two months after the Sept. 11 terrorist attacks.
The bank said inflation may ease and that prices are well under control with core inflation at 1.4 percent and overall inflation at 2.2 percent.
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