The Bank of Canada said it's cutting its target rate by a quarter-point to 4.25%, citing inflation figures that were below expectations and downside risks to the bank's inflation projection. "Global financial market difficulties related to the valuation of structured products and anticipated losses on U.S. sub-prime mortgages have worsened since mid-October, and are expected to persist for a longer period of time. In these circumstances, bank funding costs have increased globally and in Canada, and credit conditions have tightened further. There is an increased risk to the prospects for demand for Canadian exports as the outlook for the U.S. economy, and in particular the U.S. housing sector, has weakened," the bank said. The dollar rallied 1.3% to C$1.0136 on the news.