Bank of Canada cuts key interest rate to 4.75%

The Bank of Canada cut its key interest rate to 4.75%, its first rate cut since March 2020.

In his opening remarks, Governor Tiff Macklem said the bank’s monetary policy no longer needed to be so tight.

“We have made great progress in the fight against inflation, and our confidence that inflation will remain close to our 2 percent objective has grown in recent months,” Macklem said.

Economists had largely expected the move: Inflation has been approaching the BOJ’s 2% target in recent months, hitting 2.7% in April, and the bank’s preferred measure of core inflation had been easing through the spring.

Meanwhile, quarterly GDP figures released last week were weaker than expected, showing the economy grew 1.7% in the first three months of the year, raising the possibility of a rate cut.

The Bank of Canada has been through an aggressive rate-hiking cycle, last raising interest rates to 5% in July 2023 and keeping them there until Wednesday’s rate cut.

RBC, Scotiabank, BMO, TD Bank and CIBC all cut their prime lending rates to 6.95% from 7.20% as of 3pm ET on Wednesday.

Sharp cuts in interest rates could jeopardize progress: Macklem

But Macklem stressed that the Bank of Canada intends to take things “one meeting at a time.”

Macklem said Canadians can reasonably expect further rate cuts as long as inflation continues to moderate, and that the Bank of Canada remains confident that inflation is steadily approaching the bank’s 2 per cent target.

“We do not want to tighten monetary policy any more than necessary to bring inflation back to our target, but cutting policy rates too quickly could jeopardize the progress made so far,” he said.

WATCH | Why the Bank of Canada is doing things ‘one meeting at a time’:

Rate decisions are made “at each meeting,” Macklem said.

Asked whether Canadians could expect further interest rate cuts next month, Bank of Canada Governor Tiff Macklem said the timing would depend on upcoming data and what that information means for the future direction of inflation.

“It’s a small cut, but I think it’s a big gesture,” said Lois Mendes, managing director and head of macro strategy at Desjardins, who noted that the Bank of Canada was the first of the G7 central banks to start cutting rates.

With many homeowners due to renew their mortgages in the coming months, “if banks had kept interest rates high for too long, they could have pushed the economy into an unnecessary recession,” he said.

“Central banks want to cut interest rates, but they’re going to do it gradually. And because we’re not in the middle of a recession, we probably won’t see the same kind of dramatic rate-cutting cycle we’ve seen in the past few decades. What we’re trying to do now is avoid a recession.”

“With core inflation slowing and growth remaining sluggish, there is no good reason not to begin the process of cutting rates today,” CIBC economist Andrew Grantham wrote in a client note.

He expects the Bank of Canada to cut rates by another 25 basis points at its next meeting on July 24, followed by two more cuts by the end of the year.

RSM Canada economist Tu Nguyen said a single rate cut would not revive the economy overnight.

However, he said, “This signals to consumers and businesses the beginning of a gradual and orderly cycle of rate cuts over the next 18 months. The recovery is starting now and could gain momentum in 2025.”

Save money with every cut

The rate cuts are good news for adjustable-rate mortgage holders like Joseph Hopkinson, 41, a sales consultant in Toronto.

Mr Hopkinson and his wife bought their semi-detached home in June 2022. At the time, their adjustable-rate mortgage payment was $3,600 a month, but that figure has since jumped to $5,793.

“We had to start thinking hard about what we were spending our money on, and I think that was the Bank of Canada’s intention,” Hopkinson told CBC News. “They wanted us to stop spending discretionary funds.”

As a result, Hopkinson, his wife and their two children have been forced to rethink their spending on everything from groceries to car repairs to extracurricular sports.

“You go into survival mode and you start really thinking about what’s really important, and at the end of the day, of all the bills I have to pay, the one I pay is my mortgage,” he said.

Hopkinson said a quarter-point tax cut like the one handed down Wednesday would have a tangible impact on families’ finances.

“For our family, each interest rate reduction amounts to about $142. [per month]This is enough groceries for our family of four for a week.”