Months of speculation came to a head on Wednesday when the Bank of Canada (BoC) announced the first interest rate cut of the cycle. The long-awaited and much-anticipated move from the central bank was a decrease of 25 basis points, bringing the policy rate to 4.75%.
The rate has sat at 5% since July 2023. Today’s decision also marks the first cut since March 2020, when the Bank brought the policy rate down to 0.25% in response to the COVID-19 pandemic.
“With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive,” Governing Council said in a statement on Wednesday morning. “Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain. Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”
As mentioned, this marks the first rate cut since the BoC kicked off this hike cycle — widely regarded as the most aggressive in the central bank’s history — in March 2022, and comes just days after Statistics Canada’s latest report on gross domestic product, which showed that the Canadian economy continued to contract in the first quarter of the year. At 1.7% annualized, first-quarter GDP came in softer than expected.
For the many economists — including those with RBC, BMO, and CIBC — GDP, coupled with continued progress to 2% headline inflation and a looser labour market, meant that the BoC had no reason to keep the policy rate at 5% any longer.
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In particular, CIBC Economist Avery Shenfeld went as far to say that “the case for a rate cut in Canada next week is obvious” in a note from Monday.
“With the market pricing in more than a two-thirds chance of a cut, it would be a larger surprise at this point if rates aren’t eased in June,” Shenfeld said. “Clearly, investors are looking at the big picture. Four months of very tame inflation readings, likely better than what the BoC thought would be possible, fully meet the conditions for starting to ease up on policy rates that the Bank had communicated back in April.”
The BoC has four more announcements scheduled for this year — in July, September, October, and December — but Governing Council, thus far, remains tight-lipped on what the rest of the year will entail. However, a separate CIBC report from economists Ali Jaffery and Andrew Grantham forecasted that the BoC will bring the policy rate down to 4% by September.
The next BoC rate announcement is scheduled for Wednesday July 24, 2024.
