The Bank of Canada cut its benchmark interest rate by 25 basis points to 4.75 per cent on Wednesday, the first reduction in more than four years, and said further cuts may be coming if inflation continues to ease.
Wednesday’s move – the first cut from a central bank among G7 nations since 2020 – was widely expected by economists and markets. Many economists have forecast an additional cut in July, while markets began pricing in a 35 per cent chance that rates drop to 4.5 per cent next month after the decision was released, according to Reuters.
“We’ve come a long way in the fight against inflation. And our confidence that inflation will continue to move closer to the 2 per cent target has increased over recent months,” Bank of Canada Governor Tiff Macklem said in a prepared opening statement.
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“If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2 per cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate. But we are taking our interest rate decisions one meeting at a time.”
First cut 'is the most significant'
Although a 25-basis-point cut will not provide a significant amount of relief for borrowers facing the most financial strain, the cut marks a turning point in one of the most aggressive tightening cycles in the Bank of Canada’s history. Since March 2022, the bank has hiked its benchmark rate by 475 basis points to 5 per cent.
“The first cut may not necessarily be the deepest, but it is the most significant, as it marks the official turning point after more than two years of restrictive policy,” BMO chief economist Douglas Porter wrote in a research note.
“This is indeed likely to be the first of a series of cuts, although that series is not going to be a straight line down by any means. The Bank's tone is a bit more dovish than expected, but each and every cut this year will require evidence that inflation is calming.”
Macklem repeatedly stressed in a press conference on Wednesday that the central bank will be taking its interest rate decisions “one meeting at a time.” He noted that further progress on inflation “is likely to be uneven” and there remain risks to inflation going forward, including if global tensions rise, if house prices increase faster than expected, and if wage growth remains high.
But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made.BoC Governor Tiff Macklem
“We don’t want monetary policy to be more restrictive than it needs to be to get inflation back to target. But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made,” Macklem said.
The central bank also said it will closely watch the evolution of core inflation, the balance between supply and demand in the economy, inflation expectations, wage growth and corporate pricing behaviour.
“If the economy continues to evolve broadly as we had expected, if we continue to see inflation pressures easing, it is reasonable to expect that there will be further cuts in interest rates, but the timing of those cuts or of any further cuts is going to depend on incoming data and our assessment of what those data mean for the future path of inflation,” Macklem said.
“The work is not done. We’re going to be seeing how things evolve and taking our decisions one meeting at a time.”
Evidence has been mounting to support the Bank of Canada’s decision to cut. Inflation has cooled, easing from 3.4 per cent in December to 2.7 per cent in April. The central bank’s closely watched measures of core inflation have also eased, falling below 3 per cent in April. At the same time, the labour market has also been growing at a slower pace than population, and the central bank said wage pressures appear to be moderating gradually.
Economic growth in the first quarter was slower than the Bank had forecast. Still, with growth resuming, and signs of strength in consumption, business investment and housing, Macklem said that the sought-after “soft landing” is in sight for the Canadian economy.
“So far it is looking like a soft landing. The plane hasn’t been landed yet, so we’re not cheering yet. But I would say the runway is in sight,” Macklem said.
How many cuts should Canadians expect?
While many economists expect the central bank will cut rates in July, there is uncertainty in terms of how many more cuts Canadians will see by the end of the year. RBC’s Claire Fan, CIBC’s Andrew Grantham, and National Bank’s Taylor Schleich and Warren Lovely said they expect three more cuts in 2024. Vanguard chief economist Roger Aliaga-Diaz anticipates one or two additional rate cuts. TD senior economist James Orlando said “we believe that the path forward for the BoC is going to be slow.”
The central bank has four interest rate decisions remaining this year.
“How many rate cuts and how quickly they come will depend heavily on the data continuing to cooperate,” Desjardins senior director of Canadian economics Randall Bartlett wrote in a research note on Wednesday.
“Regardless, rates should move gradually lower as ongoing mortgage renewals and a slower pace of population growth weigh on economic activity, potentially to a greater degree than the Bank currently anticipates.”
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Alicja Siekierska
Canadian banks lower prime rates following BoC cut
Canada's biggest banks reduced their prime rates on Wednesday following the Bank of Canada's interest rate cut.
RBC, BMO, TD, Scotiabank and CIBC each lowered their prime rates by 25 basis points, from 7.2 per cent to 6.95 per cent.
The prime rate is the annual interest rate that banks and financial institutions use to set interest rates for variable-rate mortgages, lines of credit, and some other loans.
John MacFarlane
Reasons for and against a July cut
When it comes to the timing of a second BoC cut, two opposing considerations are at play, says Phil Mesman, portfolio manager and co-head of fixed income at Picton Mahoney Asset Management.
“A cut and pause, makes the most sense as the Bank of Canada doesn’t want to get too out of line with the Fed,” Mesman wrote in a note. “That said, it’s been rare not to further cut in subsequent meetings at the start of an easing cycle.”
Monetary policy in Canada has seen a handful of easing cycles in the past 25 years, ushered in by events such as the pandemic and the 2008 global financial crisis. In most of those, initial rate cuts have happened in quick succession.
The 25 basis point cut today is “appropriate,” especially given the speed at which interest rates rose to “extremely restrictive levels” after the pandemic, Mesman wrote, and it gives them ample room to react to new pressures. “Starting at such a restrictive stance, the Bank of Canada is able to move pre-emptively with hopes to avoid a recession and guide a soft landing.”
Alicja Siekierska
'It's about time' the BoC cut rates, says Ontario Premier Doug Ford
Ontario Premier Doug Ford is optimistic the central bank's decision to cut could help spur housing construction in the province.
According to the Canadian Press, Ford said the first cut was a good start but that the Bank of Canada should lower interest rates as quickly as it raised them.
"I believe that when you lower the interest rates, the homes will pop up like mushrooms all over the place," Ford told reporters.
"I'll be all over the Bank of Canada and I'll never stop until they continue lowering the interest rates."
It’s about time. https://t.co/ih0riVWgy0
— Doug Ford (@fordnation) June 5, 2024
Alicja Siekierska
Scotiabank's Derek Holt says Macklem's 'credibility is in tatters'
Scotiabank vice president and head of capital market economics Derek Holt had expected the Bank of Canada to hold off on cutting rates until July. Following the rate decision on Wednesday he said that he "will never believe another word from Governor Macklem."
"A few months ago he was saying he needed more data and then he turns around and cuts rates," Holt said, according to Reuters.
"I think the governor's credibility is in tatters. After letting inflation run (out of control) for four years, four months of data is not enough to cut rates."
Read more on what Holt and other economists had to say here.
John MacFarlane
Mortgage holders and small businesses to benefit: Manulife
Today’s cut will be welcomed especially by mortgage holders and small business owners “who borrow at very elevated rates and offer higher wages to their workers,” writes Dominique Lapointe, Manulife Investment Management’s director of macro strategy.
The BoC’s explicit mention of future cuts “telegraphed further easing,” Lapointe says, and presented a “still optimistic” outlook on the economy. “Hence, somewhat stronger-than-expected growth would not prevent future cuts if inflation continues to move down.”
With the rate still at 4.75 per cent, and with signs of a slowdown in the U.S. Manulife doesn’t expect the economy to overheat. “Hence, a July cut is more likely than not, as of writing.”
These positive signs should still be received prudently, however, Lapointe warned Canadians. “Rates will only decline gradually and depending on someone's circ*mstances, patience might be warranted with regards to debt taking.”
John MacFarlane
The last time the Bank of Canada cut rates
The context during the last Bank of Canada rate cut, on March 27, 2020, was somewhat different. The world was in the early days of the COVID-19 pandemic. The BoC’s surprise 50bp rate cut that Friday was the third and final cut in that era, bringing the overnight rate to 0.25 per cent.
Oil was down to US$5 a barrel and there was a dismal outlook on demand for a new iPhone. The TSX/S&P Composite Index had closed just above 11,228 a few days earlier, down from a high for the year of 17,944.10 less than a month before.
The TSX was not buoyed by the BoC announcement, closing down around 2 per cent at 12,687.90.
At the news conference to announce the cut, Stephen Poloz, Bank of Canada governor at the time, said “going lower is a theorotical possibility but not one we’re contemplating.”
John MacFarlane
Consumers welcome financial relief, but will hold on big purchases
“Most Canadians plan to be very measured with their spending until multiple rate cuts are made,” said Martha Vallance, COO of Dye & Durham, in a release following today's Bank of Canada rate cut announcement. "Today’s decision is still a good signal by the Bank of Canada and one that will have a positive effect on the economy overall."
A recent consumer sentiment survey from the legal software firm showed that most Canadians — unsurprisingly — looked forward to an interest rate cut.
Vallance said that “many Canadians have been struggling with these higher rates, delaying purchases like housing, autos and more.”
The survey data showed, however, that one cut wouldn’t open the spending floodgates.
John MacFarlane
National Bank expects July cut, ‘gradual’ pace thereafter
National Bank economists Taylor Schleich and Warren Lovely write that BoC governor Tiff Macklem’s statement “puts a July cut squarely in focus,” but point out that past BoC language has used the word “gradual” to describe the likely trajectory this year.
They argue that another 50 basis points of cuts are “appropriate” this year and more in line with that tone, contrary to the “more aggressive” median expectation of 75 basis points.
“Three more cuts over the last four decisions of the year isn’t a pace of cuts we would characterize as gradual and isn't as likely to materialize barring a more material slowdown in the economy.”
John MacFarlane
When and how many? Where economists stand on future cuts
Economists at most of Canada’s major banks reacted quickly to the BoC cut, offering various interpretations of the language in the announcement and implications for future interest rate moves.
Here’s a round-up:
Douglas Porter, chief economist, BMO Financial Group
On a July 24 cut: “If the inflation reports mimic the very mild results seen so far this year, a cut is very much on the table for that decision as well.”
Forecast for 2024: “The key message from today is that they are going to take this on a meeting-by-meeting basis.”
James Orlando, director and senior economist, TD
On a July 24 cut: “We expect the BoC is on a cut-pause-cut path, with the next cut likely occurring in September.”
Forecast for 2024: “We believe that the path forward for the BoC is going to be slow.”
Andrew Grantham, senior economist, CIBC
On a July 24 cut: “We continue to forecast a further 25bp reduction at the next meeting in July.”
Forecast for 2024: “We forecast three more cuts before the end of the year, with the policy rate finishing 2024 at 4.0%.”
Claire Fan, economist, Royal Bank of Canada
On a July 24 cut: “Our own base case assumes another 25 basis point cut in July.”
Forecast for 2024: “There will be three more rate cuts this year to lower the overnight rate to a still restrictive four per cent by the end of 2024.”
Randall Bartlett, senior director of Canadian economics, Desjardins
Forecast for 2024: “How many rate cuts and how quickly they come will depend heavily on the data continuing to cooperate.”
Taylor Schleich and Warren Lovely, economists, National Bank
On a July 24 cut: “We’d be inclined to bet they will ease again at the next meeting.”
Forecast for 2024: “Three more cuts over the last four decisions of the year isn’t a pace of cuts we would characterize as gradual and isn't as likely to materialize barring a more material slowdown in the economy.”
John MacFarlane
TD expects Bank of Canada will move slowly from here
While the Bank of Canada has “acknowledged that the economy doesn't need such high interest rates any longer,” TD Economics senior economist James Orlando expects the bank “will proceed cautiously” going forward.
“It must ensure that inflationary pressures don't rebound like they have in the U.S. in recent months,” he wrote. “It also doesn't want to reignite the housing market, where prospective buyers have been waiting for greater interest rate certainty.”
Orlando suspects the BoC “is on a cut-pause-cut path, with the next cut likely occurring in September.”
One consequence of that progression, he said, is further divergence from the U.S. Federal Reserve’s rate, “which is likely to put greater pressure on the loonie over the coming months.”
John MacFarlane
RBC hails ‘good news for Canadian households’ and expects 3 more cuts in 2024
Royal Bank of Canada economist Claire Fan says today’s Bank of Canada cut “leaves monetary policy firmly in ‘restrictive’ territory – the change in interest rates today is the equivalent of the central bank easing off the brakes rather than stepping on the gas.”
RBC still believes “there will be three more rate cuts this year to lower the overnight rate to a still restrictive 4% by the end of 2024,” with another cut coming in July, Fan wrote in a note after the central bank's rate announcement.
Today’s decision “spells good news for Canadian households that have been contending with elevated borrowing costs,” Fan wrote. But, even with three more cuts bringing the benchmark rate to a four per cent, monetary policy “will still be at levels the BoC views as ‘restrictive.’”
John MacFarlane
Vanguard Canada looking for 1 or 2 more cuts in 2024
Today’s Bank of Canada rate cut aligned with expectations at investment firm Vanguard Canada, saysRoger Aliaga-Diaz, the company’s chief economist for the Americas and global head of portfolio construction.
“The rate cut could help GDP growth come back to the trend sooner,” Aliaga-Diaz said in an email to Yahoo Finance Canada. “As inflation continues to decelerate, growth sustainability will likely become more important.”
Vanguard expects 2024 growth to come within the 1.25 to 1.5 per cent range, he says, and they “anticipate one or two additional rate cuts this year.”
John MacFarlane
Macklem reveals his NHL hopes
Pushed on a non-monetary policy question, Macklem didn't hesitate to name his pick for the Stanley Cup final.
"Let's hope the Oilers win the Stanley Cup," he quipped, without hesitation, when asked by a journalist. "Go Oilers!"
Alicja Siekierska
Macklem says 'soft landing' in sight
With growth resuming in the first quarter of the year, Macklem says the economy is on track for the sought-after “soft landing.” During his press conference on Wednesday, he also pointed to a strengthening of consumption growth, business investing picking up, and a slight pick-up in the housing market.
“So far it is looking like a soft landing [but] the plane hasn’t been landed yet. So we’re not cheering yet, but I would say the runway is in sight. But we still need to land this,” Macklem said.
John MacFarlane
'Dovish tone' suggests today's cut likely first in a series: BMO
Bank of Montreal (BMO) Capital Markets chief economist Douglas Porter writes that “the overall tone” of the Bank of Canada’s announcement was “constructive for further cuts.”
BMO had expected cuts every other month ahead of today’s announcement. However, Porter says the announcement’s “dovish tone” suggests that if CPI and jobs data ahead of the BoC’s next announcement on July 24 remain “very mild,” then “a cut is very much on the table for that decision as well.”
“The first cut may not necessarily be the deepest, but it is the most significant, as it marks the official turning point after more than two years of restrictive policy.This is indeed likely to be the first of a series of cuts, although that series is not going to be a straight line down by any means. The Bank's tone is a bit more dovish than expected, but each and every cut this year will require evidence that inflation is calming.”
John MacFarlane
'Let's just enjoy the moment': Macklem
Bank of Canada Governor Tiff Macklem’s response to a very expected question from media during the news conference drew considerable laughter for an economic event.
"If data continue to come in as expected, do you expect a rate cut in July?" asked a journalist.
Macklem replied: “I'll get to that going ahead, but let's … let's just enjoy the moment for a bit.”
John MacFarlane
Fed cut likely in September: Capital Economics
Beyond the Bank of Canada (BoC) rate cut, the other piece of a puzzle that can affect the loonie and the Canadian economy more broadly is future decisions by the Federal Reserve, with much being made of a potential divergence in interest rates.
So when is the Fed likely to cut? In a note today, Stephen Brown, deputy chief North America economist at Capital Economics, notes there is “no prospect” of a U.S. rate change next week.
Analysts are leaning towards “one or two interest rate cuts this year, with a single cut the marginally more likely median,” Brown writes.
Brown expects signs of economic weakness in the U.S. will lead to movement by end of summer. “As inflation falls a bit faster than officials expect and GDP growth disappoints, our base case remains that the Fed will cut in September.”
John MacFarlane
Get ready for ‘more active’ real estate market: Broker
The Bank of Canada rate cut should mean lower mortgage rates and a “nudge” buyers need to get back into the market, John Lusink, president of Right at Home Realty, writes in a note today.
“This rate cut is the green light homebuyers have been waiting for, and it's a win-win for both buyers and sellers, setting the stage for a dynamic and competitive market,” Lusink writes.
Spring real estate sales in Canada have been slow, with fewer sales leading to a significant jump in available inventory.
John MacFarlane
'Dovish tone': Expect another cut in July, two more after that by year end, says CIBC
Andrew Grantham, senior economist at CIBC Capital Markets, writes that “a perceived dovish tone” in the Bank of Canada announcement “suggests the likelihood of a greater number of follow-up moves.”
The 25 basis point cut came “as expected,” he writes, with economic indicators meaning “ there wasn't a good excuse to not begin the process of moving rates lower today.”
"The opening statement for the press conference noted that it would be ‘reasonable’ to expect further rate cuts if inflation continues to ease, although it also reminded investors that decisions would be taken ‘one meeting at a time.’"
“Financial markets had mostly priced in today's cut to the overnight rate beforehand, but long rates and the Canadian dollar still moved lower on the news as a perceived dovish tone suggests the likelihood of a greater number of follow up moves. We continue to forecast a further 25bp reduction at the next meeting in July, and a total of four cuts (three more after today's) by the end of the year."
