In a surprise move Tuesday, the Bank of Canada sliced interest rates by only one-quarter of a percentage point to 2.25 per cent -- a milder cut than what many investors were expecting.

In a statement Tuesday, the central bank said three major interrelated developments are having a "profound impact" on the Canadian economy:

• The intensification of the global financial crisis has led to severe strains in financial markets. The associated need for the global banking sector to continue to reduce leverage will restrain growth for some time
• The global economy appears to be heading into a mild recession, led by a U.S. economy already in recession.
• There have been sharp declines in many commodity prices.

"The outlook for growth and inflation in Canada is now more uncertain than usual," said the bank.

The G7 Plan of Action, which includes measures to stabilize financial systems, will be pivotal to resuming the flow of credit to support global economic growth, said the bank.

"Canada's economy and strong financial system will benefit directly from these actions," said the statement.

Still, the weaker outlook for global demand will increase the slowdown on the Canadian economy coming from exports.

The tightening in Canadian credit conditions will also restrain business and housing investment, said the BoC.

BNN's Michael Kane said Tuesday following the announcement that many in the marketplace were expecting a deeper half-point cut from the central bank.

"What the Bank of Canada appears to be doing is leaving itself a little bit of room," he said.

Meanwhile, Mel Fruitman, with the Consumers' Association of Canada, urged financial institutions Tuesday to pass along the Bank of Canada's rate cut to consumers through lower interest rates and even by dropping credit card rates.

Fruitman said this would allow consumers to better handle their debt load and to continue spending during the Christmas season.

Overall, the central bank expects growth to be sluggish through the first quarter of next year, then to pick up over the rest of 2009 and to accelerate to above-potential growth in 2010.

The bank projects average annual growth in real GDP of 0.6 per cent in both 2008 and 2009, and 3.4 per cent in 2010.

Core inflation is now projected to remain below 2 per cent until the end of 2010.

Total CPI inflation should peak during the third quarter of 2008, fall below 1 per cent in the middle of 2009, and then return to the 2 per cent target by the end of 2010, the bank said.

"In line with the new outlook, some further monetary stimulus will likely be required to achieve the two per cent inflation target over the medium term," said the statement.

Earlier this month, the central bank slashed its key lending rate to 2.5 per cent, one of many central banks making the move around the world.

Its next scheduled rate decision will be made on Dec. 9.

In a separate move later this week, Finance Minister Jim Flaherty is expected to announce that the federal government will guarantee new inter-bank borrowing.

The money is needed to finance operations and make credit available for mortgages and business loans.

With files from The Canadian Press