The Bank of Canada has cut its overnight rate by 25 basis points, a move not seen since the beginning of the pandemic.
Wednesday’s announcement puts the policy rate at 4.75 per cent, down from the 5 per cent it has been sitting at since July of last year.
The bank began raising its key interest rate in March of 2022, following larger-than-expected inflation numbers that followed a period of pandemic stimulus and disrupted global supply chains.
“We’ve come a long way in our fight against inflation,†said Bank of Canada Governor Tiff Macklem, during prepared remarks in Ottawa. “And our confidence that inflation will continue to move closer to the 2 per cent target has increased over recent months.â€
The central bank now sees enough evidence that underlying inflation is easing at a sustainable level. The Canadian central bank will be the first to cut rates among its peers at the Bank of England, the European Central Bank and the United States Federal Reserve.
“We don’t need to move lock and step with the Federal Reserve,†said Macklem. “We have our own currency; we have a flexible exchange rate, so that means that we can take decisions that are geared to what the Canadian economy needs.â€
The inflation rate was at 2.7 per cent in April, down from 2.9 per cent in March of this year. The economy grew by 1.7 per cent in the first quarter of 2024, below what the bank had initially forecasted.
“Growth has resumed in the first quarter, we’ll certainly be looking at our growth trajectory going forward,†Macklem said. “So far it is looking like a soft landing; plane hasn’t landed yet so we’re not cheering yet, but I would say the runway is in sight, but we still need to land this.â€
Employment grew by 90,000 in April, driven mainly by part-time employment. While employment has not kept up with the working-age population, it has allowed the number of workers to catch up to job vacancies and wage pressures have started to ease.
However, Macklem warned that risks to the inflation outlook remain and that the decision on further rate cuts will be made one meeting at a time.
“But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made,†said Macklem. “Further progress in bringing down inflation is likely uneven and risks remain.â€
Those risks include geopolitical tensions, but also rising house prices.
“We continue to point out housing as a risk to our inflation forecast,†said Bank of Canada Senior Deputy Governor Carolyn Rogers. “It’s clear there is some pent up demand in the housing market, we’ll see how it goes.â€
Speaking to reporters in Ottawa, Finance Minister Chrystia Freeland welcomed the news of a rate cut and credited her own government’s fiscal plan.
“We have been working really hard to create the economic conditions which would make it possible for the bank to lower rates and today we see the fruit of that hard work,†she said. “Canada is the first G7 country where interest rates have been lowered. Our economic plan is working and that is really welcome news for Canada and Canadians.â€
The next rate announcement is scheduled for July 24.
This article has been updated to reflect that the Bank of Canada cut its interest rate, rather than holding it.
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