The Bank of Canada cut its key interest rate to 4.5 per cent on Wednesday, with governor Tiff Macklem saying during a news conference that it would be reasonable to expect further rate cuts if inflation continues to ease.
The cut was widely expected by economists after inflation eased in June. It marked the central bank’s second consecutive cut after last month’s meeting, when it cut rates for the first time since March 2020.
“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate,” Macklem told reporters.
The bank brought key interest rates down by 25 basis points to 4.75 per cent during that June meeting. The rate had previously been held at five per cent since July 2023.
The bank began a long and aggressive cycle of rate hikes in April 2022 to tame persistently high inflation.
After a May inflation report showed that the consumer price index had crept up to 2.9 per cent, some analysts had doubts that the Bank would cut rates again in July. But June’s 2.7 per cent inflation reading quelled those concerns.
“It wasn’t that much of a surprise because inflation is coming down,” said Earl Davis, head of fixed income and money markets at BMO Global Asset Management.
He added that weaker retail sales and impending mortgage renewals likely gave the bank impetus to lower rates again.
Consumers will “have more money in their pocket because the bank [lowering interest rates] reduces your interest on your credit cards, and it reduces interest on variable mortgages,” he added.
The bank will make its next interest rate decision on Sept. 4.
Bank ‘not on a predetermined path,’ says Macklem
Macklem and senior deputy Carolyn Rogers spoke about the interest rate decision during a news conference on Wednesday morning.
With inflation expected to move closer to the bank’s two per cent goal, a slack labour market and economic conditions expected to weaken, its governing council made the decision to lower the interest rate, Macklem said during the news conference.
“At the same time, price pressures in shelter and some other services are holding inflation up. We are increasingly confident that the ingredients to bring inflation back to target are in place,” he said.
He said those opposing forces — a weak economy pulling inflation down, and shelter prices keeping it up — means a decline in inflation will most likely be gradual, with possible setbacks along the way.
He kept the door open to further interest rate cuts should inflation continue to come down, but repeated several times throughout the news conference that the bank is “not on a predetermined path” and would be taking things “one meeting at a time.”
Bank of Canada governor Tiff Macklem said that while the ingredients are in place to bring inflation down to the bank’s target of two per cent, the bank isn’t guaranteeing more back-to-back interest rate cuts. His comments come as Canada’s central bank lowered its key lending rate to 4.5 per cent on Tuesday.
‘Mistake’ to pin better housing market on interest rates
Some prospective homeowners who’ve been waiting on the sidelines are now more optimistic that lower interest rates will make home ownership more attainable.
Amy Grimble, an operations manager at a real estate firm in Scarborough, Ont., said she and her husband were sure they’d be lifelong renters as high inflation and expensive groceries gave them little opportunity to save for a home.
The two consecutive interest rate cuts “gave us just a little bit more hope,” Grimble told CBC News.
“It means that we’ll be saving a little bit per month on our mortgage,” she said, adding that it could also mean they’ll be pre-approved for a bungalow or a house rather than a condo.
If there’s an additional rate cut in September, “we might just wait until then and give us that extra time to save a little bit more,” Grimble said.
Addressing a question about housing during the news conference, Rogers said “it would be a mistake” to pin hopes for better housing market conditions on the single solution of interest rates.
Cutting interest rates has an immediate impact on mortgage lending rates for prospective homeowners like Grimble.
But rent continues to increase and insurances, taxes, maintenance costs are rising, all of which put upward pressure on shelter inflation, Rogers explained.
“The bottom line on housing is we are going to lower interest rates if the economy continues to go in the direction we expect,” she said.