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Bank of Canada cuts key interest rate for first time in more than four years

Canada’s annual inflation rate has shown steady decline in recent months.
Bank of Canada
Taxiarchos228, CC BY-SA 3.0, via Wikimedia Commons

The Bank of Canada cut its key interest rate for the first time in more than four years today, marking a major turning point in its fight against inflation.

Governor Tiff Macklem says the Bank of Canada has more confidence inflation is moving closer to its 2% target, citing various indicators that suggest price pressures have retreated.

"If inflation continues to ease, and our confidence that inflation is headed sustainably to the two per cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate," Macklem said in remarks prepared for a morning news conference. "But we are taking our interest rate decisions one meeting at a time."

With the quarter-percentage-point cut, the central bank’s key interest rate now stands at 4.75%.

The rate cut Wednesday opens a new chapter for the Bank of Canada, which has been preoccupied with wrestling inflation down over the last two years. With inflation down significantly and the economy stalling, most forecasters believed it was the right time for the central bank to begin lowering borrowing rates. The cut came as expected, said CIBC Capital Markets senior economist Andrew Grantham and was in line with economic data showing "there wasn't a good excuse to not begin the process of moving rates lower today."

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Canada’s annual inflation rate has steadily declined in recent months, reaching 2.7% in April. Measures of underlying price pressures have also eased, giving the central bank more confidence that inflation will continue to trend lower.

The Canadian economy has also weakened under the weight of high interest rates. Economic growth in the first quarter came in lower than forecasters expected, and the unemployment rate has steadily risen, reaching 6.1% in April.

READ:  Canada’s inflation rate falls to 2.7% in April as price growth slows across economy

"While a single rate cut will not revive the economy overnight, it signals to consumers and businesses the beginning of a gradual and orderly rate cut cycle that will unfold over the next year and a half," said RSM Canada economist Tu Nguyen in a note responding to the news. 

"Recovery can begin now and hit full force in 2025," she said. 

The rate decision puts the Bank of Canada ahead of other central banks in the Western world in cutting interest rates, including the U.S. Federal Reserve.

Macklem is scheduled to hold a news conference Wednesday morning to discuss the central bank’s decision.

This report by The Canadian Press was first published June 5, 2024.

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