The Bank of Canada cut interest rates by a quarter of a percentage point, making it the first Group of Seven central bank to kick off an easing cycle. Read more on the Bank of Canada Interest Rate Policy.
Policymakers led by Governor Tiff Macklem lowered the benchmark overnight rate to 4.75 per cent on Wednesday, as widely expected by markets and economists in a Bloomberg survey. Officials say they’re more confident that inflation is headed to the two per cent target, and said it’s “reasonable to expect further cuts,” if progress continues.
“With further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive,” Macklem said in prepared remarks.
The bank indicated the easing path is dependent on continued inflation progress, which policymakers say is “likely to be uneven.” Officials flagged global tensions, a faster-than-expected rise in home prices and high wage growth relative to productivity as potential risks to the outlook.
“If we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made,” Macklem said.
The Bank of Canada’s first rate cut since 2020 shows officials are increasingly confident they’re getting closer to declaring victory over inflation, which has fallen to a yearly pace of 2.7 per cent after peaking in mid- 2022. That allows policymakers to start normalizing interest rates after one of the most aggressive hiking cycles in the history of the central bank.
Still, there’s uncertainty as to how quickly borrowing costs will fall. Alongside risks to the inflation outlook, the Bank of Canada has moved before the U.S. Federal Reserve. Historically, the countries’ interest rates have tended to take a similar path, and when they don’t, there’s some pressure on the currency. A weak loonie means higher import costs, risking higher inflation. Macklem has said there are limits to how much his central bank can diverge from its U.S. counterpart.
The Bank of Canada’s decision to cut comes a day before the European Central Bank is widely expected to lower borrowing costs, making the northern nation the first in the G-7 to launch into an easing cycle. The Canadian central bank joined the Swiss National Bank and Sweden’s Riksbank to pivot to easier policy as inflation risks subsided.
Read more at: https://www.bnnbloomberg.ca/bank-of-canada-cuts-rates-to-4-75-signals-more-to-come-1.2081356
Since the beginning of this year, inflation in Canada has decelerated faster than expected. The consumer price index slowed to 2.7 per cent in April versus the central bank’s forecast of 2.9 per cent for the second quarter. Underlying price pressures have also eased for four consecutive months, with an average of the two core measures reaching 2.75 per cent in April.
Overall, policymakers see the economy in excess supply, and wage pressures moderating gradually. Still, consumption remained resilient early this year and the economy showed strong momentum heading into April, when the labour market added the most jobs in more than a year.
Between now and the July rate decision, there are two more reports for inflation as well as for jobs and retail, and the release of April gross domestic product data. Officials say they’ll continue to focus on demand and supply in the economy, inflation expectations, wage growth and corporate pricing behavior.
Macklem, along with Senior Deputy Governor Carolyn Rogers, will shed more light on the decision during a news conference at 10:30 a.m. in Ottawa.
Policymakers say they’ll continue quantitative tightening and normalize the balance sheet.
The next Rate Announcement is July 24th.
