The Bank of Canada has reduced its key interest rate to 4.75 percent, marking the first rate cut since March 2020.
Bank governor Tiff Macklem explained that the current monetary policy no longer needs to be as restrictive. “We’ve come a long way in the fight against inflation. Our confidence that inflation will continue to move closer to the two percent target has increased over recent months,” Macklem stated.
This move was largely anticipated by economists, as the inflation rate has approached the bank’s two percent goal, registering at 2.7 percent in April. The bank’s preferred core measures of inflation also eased throughout the spring.
Macklem cited increased confidence in achieving the two percent inflation target as a key reason for lowering the key interest rate to 4.75 percent. Additionally, weaker-than-expected GDP growth—only 1.7 percent in the first quarter—contributed to the likelihood of the cut.
Following a period of aggressive interest rate hikes, the Bank of Canada last raised the rate to five percent in July 2023, maintaining that level until this latest cut.
However, Macklem cautioned against lowering rates too quickly, emphasizing a cautious approach: “We don’t want monetary policy to be more restrictive than necessary to get inflation back to target. But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made.”
Royce Mendes, managing director and head of macro strategy at Desjardins, remarked on the significance of the cut, noting that the Bank of Canada is the first among G7 central banks to begin reducing rates. With many homeowners set to renew their mortgages soon, Mendes pointed out that maintaining high rates too long could have pushed the economy into an unnecessary recession.
CIBC economist Andrew Grantham suggested that with decelerating core inflation and tepid growth, it was prudent to begin lowering rates now. He anticipates another 25 basis point cut at the next meeting on July 24, followed by two more cuts by the end of the year.
Tu Nguyen, an economist with RSM Canada, noted that a single rate cut won’t immediately revive the economy but signals the start of a gradual and orderly rate reduction cycle over the next year and a half. This, she believes, will enable full economic recovery by 2025.
For individuals like Joseph Hopkinson, a Toronto sales consultant with a variable rate mortgage, the rate cut is significant. Hopkinson, who saw his monthly mortgage payments rise from $3,600 to $5,793, shared how his family had to be more mindful of their spending. “We had to start being really thoughtful about what we were spending money on, which I think was the Bank of Canada’s intent,” he told CBC News.
The recent rate cut would provide tangible relief, reducing his family’s monthly mortgage payment by approximately $142, equivalent to a week of groceries for his family of four.
