The Bank of Canada unexpectedly lowered interest rates by a quarter-point after the Canadian dollar’s rally slowed inflation and market “volatility” threatened to cool economic growth.

The bank is the second among the Group of Seven to reduce borrowing costs as officials try to keep August’s credit collapse from spurring a global economic slump. Federal Reserve Chairman Ben S. Bernanke and Bank of England Governor Mervyn King expressed concern last week of a further deterioration in financial markets that threatens to hurt consumer spending.

Bank of Canada officials, led by Governor David Dodge, cut the target rate for overnight loans between commercial banks to 4.25 percent. “The Bank now expects inflation over the next several months to be lower than was projected,” the bank said today in Ottawa. The statement also cited “global financial- market difficulties” and an “increased risk” to exports.

Canada’s dollar fell after the decision, which brought the Canadian benchmark rate below the Fed’s main rate. Dodge is concerned that the local currency’s surge to a record high is making Canadian products uncompetitive. Bonds gained.

The change, which reverses an increase in July, was anticipated by 12 of 27 economists surveyed by Bloomberg News. [MORE]