The TSX/S&P composite index started to climb immediately following the Bank of Canada’s rate cut announcement this morning. By 10 a.m., the index was up 224.74 points, or 1.85%, at 12,356.87.

As widely expected, the central bank today announced that it is lowering its target for the overnight rate by 25 basis points to 4%.

The operating band for the overnight rate is correspondingly lowered, and the bank rate is now 4.25%.

The central bank’s announcement was upstaged by a surprise announcement from the U.S. Federal Reserve Board.

The Fed slashed its target for the federal funds rate by 75 basis points to 3.5%. The discount rate was also reduced by 75 basis points to 4%.

In New York, stocks dropped on word of the surprise rate cuts. The Dow was done more than 400 points on opening, after markets were closed yesterday for Martin Luther King Jr. Day. It recovered slightly in early morning trading but at 10:30 a.m. was still down 125 points.

The S&P 500 fell 38.34 points to 1,286.85, in the morning, while the Nasdaq Composite dropped 72.50 points, or 3%, to 2,270.45.

Comments from the Fed, “seem to suggest that further cuts in Fed funds are likely with the next reduction coming at the next FOMC meeting January 29-30,” according to Paul Ferley, assistant chief economist at RBC Financial. “Additional cuts beyond that point will depend on whether recent actions by the Fed are sufficient in reversing deteriorating financial markets”

The Bank of Canada said in a statement: “Financial market conditions have deteriorated since October, leading to a tightening of credit conditions in industrial countries. Given this, and a deeper, more prolonged decline in the U.S. residential housing sector, the 2008 outlook for the U.S. economy is now significantly weaker than at the time of the October MPR.”

“For Canada, the effects of the weaker U.S. economic outlook will lead to additional downward pressure on export growth.”

“In line with this outlook, the Bank has decided to lower the target for the overnight rate and further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to return inflation to target over the medium term.”

The Bank of Canada’s next scheduled date for announcing the overnight rate target is March 4.

“Our baseline forecast is that the Bank will lower the overnight rate by another 50 basis points during the next couple of meetings with the risk of more aggressive rates cuts if the US situation continues to deteriorate,” wrote Dawn Desjardins, senior economist at RBC Economics, in a note following the Bank of Canada’s announcement.

Royal Bank was the first to announce Tuesday it had decreased its prime lending rate by 25 basis points to 5.575% from 6%, and TD Bank Financial Group, Bank of Montreal, CIBC, and Bank of Nova Scotia quickly followed suit.