The Bank of Canada lowered its key interest rate by 25 basis points on Wednesday in Ottawa. The cut, which was expected by a majority of economists in a Bloomberg survey, is the first since 2020.
Here are the key takeaways:
- Governor Tiff Macklem said in prepared remarks it is “reasonable to expect further cuts to our policy interest rate,” if “inflation continues to ease, and our confidence that inflation is headed sustainably to the two per cent target continues to increase.”
- He added policymakers are taking interest rate decisions one meeting at a time. “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.”
- Officials said recent data has increased their confidence that inflation will continue to move toward the two per cent target. Macklem highlighted four indicators:
- Consumer price index has slowed to 2.7 per cent in April from 3.4 per cent in December.
- Core measures of inflation have come down to about 2.75 per cent in April from about 3.5 per cent in December.
- The three-month rates of core measures eased to under two per cent in March and April from about 3.5 per cent in December.
- The proportion of CPI components increasing faster than three per cent is now close to its historical average, suggesting price increases are “no longer unusually broad-based.”
- “Further progress in bringing down inflation is likely to be uneven and risks remain,” Macklem said, pointing to three key risks: the escalation of global tensions, a faster-than-expected rise in house prices in Canada and high wage growth relative to productivity.
- With first-quarter gross domestic product expanding less than forecast and employment growing at a slower pace than the working-age population, recent data suggest the economy is still operating in excess supply, officials said.
- “With the economy in excess supply, there is room for growth even as inflation continues to recede,” Macklem said.
- Macklem said policymakers will continue to closely watch the evolution of core inflation and remain focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour.
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