Canada becomes first G7 central bank to cut interest rates this cycle

Canada’s central bank has cut its main interest rate, making it the first G7 nation to loosen monetary policy in the current cycle.

The Bank of Canada lowered its policy rate to 4.75 per cent on Wednesday, having held it at 5 per cent since July last year. Traders on Tuesday had placed the probability of a June rate cut at 84 per cent, according to a Reuters poll.

“Governing council decided monetary policy no longer needs to be as restrictive,” BoC governor Tiff Macklem said.

“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.”

Canada’s economy has softened in the past few months. First-quarter GDP growth of 1.7 per cent was below consensus expectations for 2.2 per cent, while an unemployment rate of 6.1 per cent in April was the highest in more than two years. Headline inflation was 2.7 per cent year on year in April.

Macklem in May said Canada’s rate-setters did not need to move in lockstep with the US Federal Reserve in timing rate cuts. On Wednesday, he said “it is reasonable to expect further cuts” if inflation continued to ease, but there were risks to moving too quickly.

“Inflation could be higher if global tensions escalate, if house prices in Canada rise faster than expected, or if wage growth remains high relative to productivity,” he continued.

Andrew Grantham, a senior economist at the Canadian Imperial Bank of Commerce, called the commentary around the June decision “dovish”. CIBC expects three more BoC rate cuts this year, with the next in July.

“Let’s just enjoy the moment a bit,” Macklem said, after a press conference started with two questions about when the next rate cut would come. “The timing of any further cuts is going to depend on incoming data.”

The BoC decision follows rate cuts from central banks in Latin American countries such as Mexico, Brazil and Chile this year, but it is the first member in the G7 to make the move. Traders expect other member countries except Japan to loosen monetary policy in the coming months.

The European Central Bank, which governs monetary policy in France, Italy and Germany, is widely expected to make its first cut of the cycle this week. The Bank of England is forecast to do the same this month.

In the US, there is a 55 per cent probability of a rate cut in September by the Fed, according to a Reuters poll, but the country’s robust economy and persistent inflation has forced analysts to repeatedly scale back their expectations for looser monetary policy.

“What happens in the United States has a big impact on our economy,” Macklem told reporters. “There are limits to how far we can diverge from the United States, but we’re not close to those limits.”