BANK OF CANADA CUTS KEY INTEREST RATE TO 4.75%

The Bank of Canada recently decided to lower its key interest rate to 4.75%, marking the bank’s first rate cut since March 2020. The bank’s governor, Tiff Macklem, mentioned that the bank’s monetary policy no longer needs to be as restrictive due to the significant progress made in the fight against inflation. This confidence in inflation moving closer to the 2% target has been reinforced by recent inflation numbers, which came in at 2.7% in April, and the easing of the bank’s preferred core measures of inflation throughout the spring.

Although the quarterly GDP numbers released last week were weaker than expected, showing a 1.7% growth in the economy during the first three months of the year, the likelihood of a rate cut increased. This comes after a series of aggressive interest rate hikes, with the last hike increasing the rate to 5% in July 2023, which was held until Wednesday’s cut.

Following the Bank of Canada’s decision, major banks such as RBC, Scotiabank, BMO, TD Bank, and CIBC have already reduced their prime lending rates. It’s been stated that the Bank of Canada will be taking things “one meeting at a time.”

Looking ahead, Canadians can expect further cuts as long as inflation continues to ease and the bank remains confident in inflation steadily approaching the 2% goal. The Bank of Canada aims to ensure that monetary policy is not more restrictive than necessary to bring inflation back in line with the target, while also avoiding jeopardizing the progress made so far.

The rate cut is seen as a grand gesture, signifying the beginning of a gradual and orderly rate-cut cycle. With core inflation decelerating and growth remaining tepid, there is no good excuse not to begin the process of moving rates lower.

It is anticipated that the Bank of Canada will continue to lower interest rates at its next meeting on July 24, with additional cuts expected before the end of the year. While it’s recognized that a single rate cut won’t revive the economy overnight, this signals the start of a gradual and orderly rate-cut cycle that will unfold over the next year and a half, potentially leading to a fuller economic recovery in 2025.

The rate cut presents a positive outlook for variable-rate mortgage holders, especially for those whose payments have increased significantly in recent years. This development can make a tangible impact on their budgets, providing some relief.