Bank of Canada makes key interest rate decision

The Bank of Canada has cut its key interest rate by 0.25 per cent to 4.75 per cent, the first interest rate cut since the BoC’s hiking cycle began in early 2022.

Many had predicted cuts would come earlier this year, however the somewhat stubborn nature of Canadian inflation as well as concerns about wage growth and reinflation of the housing market held BoC Governor Tiff Macklem back. At this meeting, however, the BoC saw enough evidence of “further and sustained easing” across the inflation metrics it watches.

“With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data has increased our confidence that inflation will continue to move towards the 2% target,” the announcement reads.

GDP growth in Canada has stalled, unemployment has risen, and CPI has come down closer to the Bank’s two per cent target for several months at this point. The only area that has remained elevated is wage inflation. Some analysts had predicted that wage inflation would give Macklem pause before her announced a cut.

Going into this meeting, markets had priced in a roughly 80 per cent probability of a cut. While the first cut has come, there is still not much expectation that we will see further sharp interest rate cuts. This period is predicted to be more gradual as the BoC seeks to arrive at a ‘neutral’ rate which is neither recessionary nor overly inflationary for the economy.

There is also some concern that we get a ‘hawkish cut’ whereby cuts are accompanied by hawkish language and are even shallower than most predict. Macklem’s language following the announcement will be instructive as to that possibility.

“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,” the announcement reads. “The Bank remains resolute in its commitment to restoring price stability for Canadians.”