The Bank of Canada cut its key interest rate for the first time in more than four years Wednesday, marking a major turning point in its fight against inflation.
Governor Tiff Macklem says the central bank has more confidence inflation is moving closer to its two per cent target, citing various indicators that suggest price pressures have retreated.
“If inflation continues to ease, and our confidence that inflation is headed sustainably to the two per cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate,” Macklem said in remarks prepared for a morning news conference.
“But we are taking our interest rate decisions one meeting at a time.”
With the quarter-percentage-point cut, the central bank’s key interest rate now stands at 4.75 per cent.
The rate cut Wednesday opens a new chapter for the Bank of Canada, which has been preoccupied with wrestling inflation down over the last two years.
With inflation down significantly and the economy stalling, most forecasters believed it was the right time for the central bank to begin lowering borrowing rates.
The cut came as expected, said CIBC Capital Markets senior economist Andrew Grantham and was in line with economic data showing “there wasn’t a good excuse to not begin the process of moving rates lower today.”
Canada’s annual inflation rate has steadily declined in recent months, reaching 2.7 per cent in April.
The Canadian economy has also weakened under the weight of high interest rates. Economic growth in the first quarter came in lower than forecasters expected, and the unemployment rate has steadily risen, reaching 6.1 per cent in April.
A quarter-percentage-point rate cut won’t turn things around for the economy, but TD’s director of economics, James Orlando says it paves the way for more rate cuts in the coming months.
“It’s the start of what’s likely going to be an easing cycle for the Bank of Canada. So it’s not just about today’s cut,” Orlando said.
TD expects the Bank of Canada to lower its key interest rate to 4.25 per cent by the end of the year.
The rate decision puts the Bank of Canada ahead of other central banks in the Western world in cutting interest rates, including the U.S. Federal Reserve.
When asked how much the Bank of Canada can diverge from its peers, Macklem said that it doesn’t need to walk in lockstep with the Fed.
“There are limits to how far we can diverge from the United States, but we’re not close to those limits,” he said.
This report by The Canadian Press was first published June 5, 2024.
The Canadian Press
