Canada central bank cuts key lending rate, signals more ahead

OTTAWA — Canada’s central bank cut its key lending rate by 25 basis points on Wednesday, signaling an end to two years of aggressive monetary policy as it tames inflation.

The reduction brought the rate to 4.75 percent, making it the first among the Group of Seven leading economies to ease monetary policy in the current cycle.

“With continued evidence that underlying inflation is easing, (the bank’s) Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate,” the Bank of Canada said in a statement.

At a news conference, bank Governor Tiff Macklem cheered: “We’ve come a long way in the fight against inflation.”

“And our confidence that inflation will continue to move closer to the two percent target has increased over recent months,” he said.

READ: Canada inflation ticked lower to 2.7% in April

He noted that “restrictive monetary policy is working to relieve price pressures.”

With more sustained evidence that underlying inflation is easing, he said, it became appropriate to lower the policy rate.

If inflation does moderate further as expected, he added, “it is reasonable to expect further cuts.”

Preemptive action

Economists had widely expected this first rate cut in four years.

“Rather than waiting for a recession to take hold, officials are acting preemptively to guide the economy towards a soft landing,” Desjardins analyst Royce Mendes said in a research note.

Surprised by the bank’s “explicit guidance” on further cuts to come, he predicted that the next reduction could come as soon as in July.

The moves would take the key lending rate down to roughly 3.5 percent by the middle of next year, he said.

The central bank had begun hiking rates from a record low of 0.25 percent in March 2022 in a bid to tame soaring inflation, marking the biggest interest rate shock in decades in the country.

READ: Bank of Canada likely to lead the U.S. Fed in rate cuts

Although Wednesday’s modest cut will not make borrowing significantly cheaper for Canadians, the end of the monetary policy tightening cycle is expected to bring new confidence to the economy.

Further rate cuts would also provide relief to millions of Canadian homeowners facing mortgage renewals this year or in 2025.

The bank noted that businesses continue to hire but at a slower pace than the working-age population.

Inflation recently slowed to 2.7 percent — its lowest level in years — while the economy grew less than expected at 1.7 percent in the first quarter.

Macklem warned, however, that there are risks that inflation could rise, “if global tensions escalate, if house prices in Canada rise faster than expected, or if wage growth remains high relative to productivity.”