Bank of Canada Cuts Benchmark Interest Rate to 4.75%
On June 6, 2024, the Bank of Canada (BoC) announced a reduction in its benchmark interest rate by 25 basis points, bringing the rate down to 4.75%. This decision marks the first rate cut by the BoC in over four years and comes after six consecutive meetings where the rate was held steady at 5.0%.
Reasons Behind the Rate Cut
The BoC cited several key factors influencing its decision to lower the interest rate:
- Inflation Trends: Inflation in Canada has been on a downward trajectory, easing from 3.4% in December to 2.7% in April. The central bank's preferred core measures of inflation have also shown signs of easing throughout the spring. This progress towards the BoC's 2% inflation target provided the confidence needed to implement the rate cut.
- Economic Growth: The Canadian economy experienced weaker growth in the first quarter of 2024 compared to the expectations, following a period of stagnation in the latter half of the previous year. Despite this, there are signs of economic recovery, with growth resuming in the first quarter of 2024.
- Labour Market Conditions: Employment growth has been slower than the increase in the working-age population, and wage pressures appear to be moderating. This suggests that the labour market is not overheating, which aligns with the central bank's goal of maintaining balanced economic conditions.
Market Reactions and Future Expectations
The rate cut was widely anticipated by economists and market participants, with an 83% probability of a cut priced in before the announcement. Following the decision, the Canadian dollar weakened slightly against the US dollar, trading just above 1.37 per USD.
Economists from major Canadian banks have varied interpretations of the BoC's announcement, but many expect another rate cut in July, with markets pricing in a 35% chance of rates dropping to 4.5% next month. The BoC has indicated that future rate decisions will be made on a series of meetings, depending on the progress of inflation and other economic indicators.
Implications for the Canadian Economy
The rate cut marks a significant shift in the BoC's monetary policy, which had previously been one of the most aggressive tightening cycles in its history. The central bank's decision to ease monetary policy reflects its confidence that inflation will continue to move towards the 2% target, although it acknowledges that risks to the inflation outlook remain.
Governor Tiff Macklem emphasized that while the rate cut is a step towards supporting economic growth, the BoC will remain cautious and flexible in its approach, ensuring that the progress made in reducing inflation is not under threat.