Bank of Canada on Thursday, May 18, 2023 in Ottawa, Ontario, Canada.
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The Bank of Canada cut its key policy rate by 25 basis points to 4.75% on Wednesday, a widely expected move marking the first rate cut in four years and signaling the possibility of more easing if inflation continues to slow.
Economists immediately predicted the central bank would cut interest rates again in July.
Nearly a year after keeping interest rates at a more than two-decade high of 5%, the Bank of Canada said indicators of underlying inflation were looking increasingly optimistic.
“With further and more sustained evidence that inflation is slowing, monetary policy no longer needs to be as stringent,” Governor Tiff Macklem said in his opening remarks after the announcement.
However, financial markets put the probability of a rate cut next month at 35% to 4.50%. Most economists polled by Reuters expected a rate cut on Wednesday.
After the decision was announced, the Canadian dollar gave up its early gains against the US dollar, falling 0.4% to 1.3733, or 72.98 US cents.
The Bank of Canada joined the Swedish Riksbank and the Swiss National Bank in lowering interest rates that burdened households and businesses and held back economic growth as price pressures eased.
Financial markets expect the European Central Bank to most likely follow suit on Thursday.
Canada’s inflation rate has slowed this year, reaching a three-year low of 2.7% in April. Although inflation has remained below 3% for four consecutive months, it is still above the central bank’s 2% target.
“If inflation continues to moderate and our confidence that inflation can sustainably reach our 2% target continues to grow, then we have reason to expect further reductions in our policy rate,” McClam said of possible future rate cuts. .
“But we have a rate decision every time,” he added.
Macklem has repeatedly warned Canadians that interest rates won’t fall as fast as they rise, saying further progress against inflation could be uneven and risks remain.
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