Benchmark rate drops for first time in over four years
The Bank of Canada has cut its benchmark interest rate by 25 basis points, a decision that marks the first time its key rate has fallen since the beginning of the COVID-19 pandemic.
The central bank said on Wednesday morning that it was lowering its trendsetting interest rate, which leads variable mortgage rates in Canada, to 4.75% amid encouraging signs on the inflation outlook and mounting evidence of an economic cooldown.
That long-awaited move arrives more than four years after the last time the Bank cut interest rates, when the onset of the pandemic and widespread economic disruption saw the central bank slash rates to a rock-bottom 0.25%.
It also marks the first step in an expected path by the central bank towards lower rates, with its governing council having kept borrowing costs resolutely high since 2022 thanks to stubbornly high inflation and a surprisingly resilient labour market.
However, developments in recent weeks have suggested that the economic indicators most closely watched by the Bank were trending firmly in the right direction.
Expectations of an imminent rate cut surged last week after the revelation that Canada’s economy expanded more slowly than had been expected in 2024’s first quarter. Royal Bank of Canada (RBC) assistant chief economist Nathan Janzen said a surprisingly muted first quarter for the economy “likely removes the last potential barrier” preventing a central bank cut.
Meanwhile, Canada’s annual rate of core inflation has declined for four consecutive quarters, with April’s overall consumer price index (CPI) reading of 2.7% also meaning it has fallen within the central bank’s target range for four months in a row.
Attention is now likely to focus on the Bank’s intentions for the rest of the year – and specifically, how many times and by how much it plans on lowering rates further.
The central bank is scheduled to meet four more times before the end of 2024, with its next decision to arrive on July 24.
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