The Bank of Canada has lowered its key interest rate to 4.75 per cent, marking the bank’s first rate cut since March 2020.
Bank governor Tiff Macklem said in opening remarks that the bank’s monetary policy no longer needs to be as restrictive.
“We’ve come a long way in the fight against inflation. And our confidence that inflation will continue to move closer to the two per cent target has increased over recent months,” Macklem said.
Economists were largely expecting the move. The inflation rate has moved closer to the bank’s two per cent goal in recent months, coming in at 2.7 per cent in April, with the bank’s preferred core measures of inflation also easing throughout the spring.
Bank of Canada governor Tiff Macklem said confidence that inflation would move closer to the bank’s two per cent target has increased in recent months, as he outlined the reasons behind the move to trim the bank’s key interest rate to 4.75 per cent.
Meanwhile, quarterly GDP numbers released last week were weaker than expected: the economy grew by 1.7 per cent during the first three months of the year, increasing the likelihood of a cut.
After a cycle of aggressive interest rate hikes, the Bank of Canada last hiked the rate to five per cent in July 2023 and held it there until Wednesday’s cut.
RBC, Scotiabank, BMO, TD Bank and CIBC had cut their prime lending rates to 6.95 per cent from 7.20 per cent as of 3 p.m. ET on Wednesday.
Lowering rates too quickly could jeopardize progress: Macklem
But Macklem stressed that the Bank of Canada is going to take things “one meeting at a time.”
Canadians can reasonably expect more cuts so long as inflation continues to ease, and the bank maintains its confidence that inflation is steadily approaching the bank’s two per cent goal, Macklem said.
“We don’t want monetary policy to be more restrictive than it needs to be to get inflation back to target. But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made,” he said.
Bank of Canada governor Tiff Macklem, when asked if Canadians can expect to see a further interest rate cut next month, says the timing will depend on incoming data and what that information means for the future path of inflation.
“It’s a small cut, but I think a grand gesture,” said Royce Mendes, managing director and head of macro strategy at Desjardins. He noted that the Bank of Canada is the first of the G7 central banks to begin cutting rates.
With many homeowners set to renew their mortgages in the next few months, “if the bank had left interest rates high for too long, we could have tipped the economy into an unnecessary recession,” he noted.
“They want to get rates down, but they’ll do it in a gradual way, and it’ll probably be a less pronounced rate-cutting cycle than we’ve seen in prior decades, because we’re not in the midst of a recession. What we’re trying to do right now is fend one off.”
CIBC economist Andrew Grantham wrote in a note to clients that “with core inflation decelerating and growth remaining tepid there wasn’t a good excuse to not begin the process of moving rates lower today.”
He expects the Bank of Canada to lower interest rates by another 25 basis points at its next meeting, on July 24, with another two cuts after that before the end of the year.
Tu Nguyen, an economist with RSM Canada, noted that a single rate cut won’t revive the economy overnight.
But she said it “signals to consumers and businesses the beginning of a gradual and orderly rate cut cycle that will unfold over the next year and a half. Recovery can begin now and hit full force in 2025.”
Saving money with every cut
The rate cut is positive news for variable rate mortgage holders like Joseph Hopkinson, 41, a sales consultant in Toronto.
Hopkinson and his wife bought a semi-detached house in June 2022. At the time, their variable mortgage payment was $3,600 a month — but that figure has since skyrocketed to $5,793.
“We had to start being really thoughtful about what we were spending money on, which I think was the Bank of Canada’s intent,” Hopkinson told CBC News. “They wanted us to stop spending discretionary funds.”
That forced Hopkinson, his wife and their two kids to rethink their spending — from groceries to car repairs to extracurricular sports.
“You go into survival mode, you really start thinking about what’s really important. And at the end of the day, of all the bills I’m going to pay, I’m going to pay my mortgage,” he said.
A quarter point cut like the one that was handed down Wednesday would have a tangible impact on the family’s budget, according to Hopkinson.
“One rate cut for our family would be approximately $142 [per month], which is about a week of groceries for our family of four.”