As was widely expected, the Bank of Canada has lowered its trendsetting overnight interest rate by 25 basis points to 4.75% from 5% previously.
Economists and financial markets had forecast the interest rate reduction, which is the first since the Covid-19 pandemic began in 2020.
The move by the Bank of Canada comes ahead of the U.S. Federal Reserve, which has not been able to lower interest rates due to stubbornly high inflation and a resilient economy south of the border.
In announcing the interest rate cut, the Bank of Canada said in a news release that “Inflation in most advanced economies continues to ease, although progress towards price stability is bumpy and is proceeding at different speeds across regions.”
Canada’s central bank also pointed to signs of a sluggish domestic economy in making its decision to lower rates, noting that economic growth resumed in the first quarter of this year after largely stalling in the second half of 2023.
“Labour market data show businesses continue to hire, although employment has been growing at a slower pace than the working-age population,” said the bank.
The interest rate cut comes as inflation in Canada declined to an annualized rate of 2.7% in April. The inflation rate has steadily fallen from a peak of more than 8% in June 2022.
The Bank of Canada targets inflation at a 2% annualized rate.
“Indicators of the breadth of price increases across components of the CPI have moved down further and are near their historical average,” said the Bank of Canada in its news release.
While the central bank cautioned that risks to the inflation outlook remain, it said that “Recent data has increased our confidence that inflation will continue to move towards the 2% target.”
Before the current reduction, the Bank of Canada’s key interest rate had been at 5%, its highest level in more than 20 years, impacting rates charged on everything from credit cards to home and auto loans.
The Bank of Canada is next scheduled to decide on interest rates July 24.
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