The Bank of Canada has cut its key interest for the first time in four years.
The central bank announced a 0.25% rate cut Wednesday morning as it continues to try to stabilize markets and keep inflation in check.
The decision to reduce interest rates by a quarter of a percentage point reduction makes the Bank of Canada the first G7 central bank to begin its easing cycle.
Bank of Canada Governor Tiff Macklem dropped the benchmark overnight rate to 4.75% on Wednesday, a decision that has been widely anticipated by economists for some time.
“We’ve come a long way in the fight against inflation. And our confidence that inflation will continue to move closer to the two per cent target has increased over recent months,” said Macklem.
Officials with the central bank say they’re more confident that inflation will reach the 2% target and that if progress continues, it’s “reasonable to expect further cuts.”
“With further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive,” said Macklem.
Canada’s economic growth resumed in the first quarter this year after being stalled in the second half of 2023.
While GDP growth was slower than expected, consumption growth remained steady at 3% and business investment and housing activity also saw an increase.
According to labour market data, businesses are continuing to hire but employment still lags behind the pace of the working age population.
Consumer price inflation fell to 2.7% in April after peaking in 2022, however, shelter price inflation, which relates to costs surrounding housing, remains high.
“With continued evidence that underlying inflation is easing…monetary policy no longer needs to be as restrictive,” reads a Bank of Canada release.
“Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain.”
The Bank of Canada says it will be closely watching inflation and the balance between supply and demand in the economy, along with wages and corporate pricing.
The Bank of Canada cited global tensions as a potential risk to further cuts, along with faster-than-expected rise in home prices and wage-growth in relation to productivity.
“If we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made,” said Macklem.
The Bank of Canada’s decision to cut interest rates comes one day before the European Central Bank is expected to announce lower borrowing costs.
The next scheduled date for announcing the overnight rate target will be July 24,at which time the central bank will also publish its next full outlook on inflation, including risks to the projection.
