Bank of Canada interest rate cuts begin
BANK OF CANADA PHOTO
“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,” Bank of Canada Governor Tiff Macklem said today.
Let’s allow the Bank of Canada a moment to celebrate - a mini victory lap.
The Bank of Canada on Wednesday began what is expected to be a series of interest rate cuts over the next 18 months that will ease pressure on the nation’s indebted households and provide a much needed lift to the economy.
Policy makers, led by Governor Tiff Macklem, cut their main policy rate by a quarter percentage point to 4.75 per cent, citing continued evidence that inflation is easing. The cut sets the stage for commercial banks to lower prime lending rates in coming days, which should lower borrowing costs immediately for variable rate loans.
The rate cuts represent a culmination of a very difficult two-year period for the central bank, which was forced to drive up interest rates to some of the highest levels in decades in order to thwart inflation that it was in part responsible for. And the central bank managed to do so without driving the economy into a major downturn, even though the effects of higher borrowing costs are weighing heavily on growth.
The coveted soft land, or so-called immaculate disinflation, that many had doubted was possible (including myself) remains within reach. This is a major achievement, and the Bank of Canada deserves kudos. It wasn’t easy to implement the most aggressive rate hiking cycle in a generation, in the face of political pressure to ease off. So, today is a feel-good moment for the central bank.
“Let’s just enjoy the moment a bit,” Macklem told reporters at a press conference, when asked if he would cut rates again at his next decision in July.
The central bank hasn’t fully won the war against inflation, but it’s getting there. Inflation has been hovering below three per cent all year and appears to be on track to be easing further – raising confidence that the Bank of Canada’s two per cent target is within reach.
Economists are predicting the main policy rate will be cut by another half percentage point this year, and another three quarters of a point or more by the end of 2025. The end result will still leave interest rates high relative to recent history, but less harmful than existing levels.
But as I wrote two weeks ago, the big challenge for the Bank of Canada will be to keep expectations in check – which is what Macklem sought to do at the press conference.
The Bank of Canada will be wary of moving too quickly, lest inflation resurfaces. It will err on the side of caution. That means any future cuts will be contingent on whether inflation continues to fall. In other words, the Bank of Canada will be very data dependent; don’t expect it to get too aggressive.
“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 an opening statement to reporters. “But we are taking our interest rate decisions one meeting at a time.”
The end of the current era of relatively high interest rates in Canada is in sight. But there’s still a long way to go.
