Citing cooling inflation, the Bank of Canada has cut its key interest rate from five to 4.75 per cent. Bank governor Tiff Macklem also hinted that more rate cuts could follow.
The Bank of Canada has reduced its key interest rate to 4.75%, marking the first cut since March 2020. Governor Tiff Macklem explained that the monetary policy does not need to be as restrictive now, given the progress against inflation. He noted increased confidence that inflation is moving towards the 2% target.
Economists anticipated this move as inflation has been aligning with the bank’s target, reaching 2.7% in April. Additionally, weaker-than-expected GDP growth of 1.7% in the first quarter supported the decision for a rate cut. Following a series of aggressive rate hikes that culminated in a 5% rate in July 2023, the bank decided to ease rates on Wednesday.
Major banks, including RBC, Scotiabank, BMO, TD Bank, and CIBC, subsequently reduced their prime lending rates to 6.95% from 7.20%.
Macklem emphasized a cautious approach, stating that while further cuts are possible if inflation continues to ease, the bank will proceed carefully to avoid undoing progress. “We don’t want monetary policy to be more restrictive than necessary, but reducing rates too quickly could jeopardize our achievements,” he remarked.
Royce Mendes, Desjardins’ head of macro strategy, viewed the cut as a significant gesture, noting that the Bank of Canada is the first G7 central bank to reduce rates. Mendes highlighted the potential risk of maintaining high rates, which could push the economy into a recession, especially with many homeowners facing mortgage renewals soon.
CIBC economist Andrew Grantham supported the cut, citing decelerating core inflation and sluggish growth as reasons to begin lowering rates. He predicts another 25 basis point reduction at the next meeting on July 24 and expects two more cuts by the end of the year.
Tu Nguyen, an economist at RSM Canada, cautioned that a single rate cut won't immediately rejuvenate the economy. However, she believes it signals the start of a gradual rate reduction cycle, aiming for full recovery by 2025.
For individuals like Joseph Hopkinson, a Toronto sales consultant, the rate cut is welcome news. His variable mortgage payment, which soared from $3,600 to $5,793 monthly, has forced his family to tightly manage their budget. Hopkinson explained that the reduction would save his family approximately $142 per month, roughly equivalent to a week's groceries for his family of four.
Overall, the Bank of Canada's rate cut is seen as a strategic move to support economic stability while cautiously managing inflation targets.
