The Bank of Canada cut its key interest rate on Tuesday by a quarter point, less than expected, to 2.25 percent but said it would likely have to ease further to combat the effects of the global financial crisis.

"In line with the new outlook, some further monetary stimulus will likely be required to achieve the 2 percent inflation target over the medium term," it said in a statement marking the lowest overnight lending rate since September 2004.

Nearly all of Canada's 12 primary securities dealers had expected a rate cut, according to a Reuters poll on Friday, but nine of those believed the bank would cut by a heftier half-point while only three expected a quarter-point decrease.

The Bank of Canada has now reduced rates by 2.25 percentage points since last December, which it said had given "timely and significant support" to the Canadian economy.

The bank slashed its projections for economic growth and inflation, citing a global economic downturn, financial markets in stress and a fall in commodity prices.

It sees Canada narrowly avoiding a recession in both 2008 and 2009, with annual growth of 0.6 percent each year, down from its July projections of 1.0 percent and 2.3 percent growth, respectively. But it sees growth roaring back in 2010 with 3.4 percent growth.

At the same time, inflationary pressures have diminished, it said. The bank expects inflation to peak in the third quarter of this year, then fall below 1 percent in mid-2009 before returning to the 2 percent target by the end of 2010.

Core inflation, which strips out volatile items and guides the bank's rate decisions, will likely stay below 2 percent until late 2010 whereas the bank previously saw it returning to target by the second half of 2009.

The bank warned of "significant risks" to its outlook on the upside, not just the downside, referring to the possibility that the central bank and government emergency steps to boost liquidity and help banks could boost growth more quickly than expected.

"The evolution of the financial crisis, its impact on the global economy and the timing of the effects of the various extraordinary measures being taken to address it pose significant risks to the projection on both the upside and the downside," it said.

The bank judges the U.S. economy to be already in recession and said the global economy appeared to be heading for a "mild recession," which it defined as less than 3 percent growth.