Wednesday’s move by the Bank of Canada – the first cut from a central bank among G7 nations since 2020 – was widely expected by economists and markets. (REUTERS / Reuters)

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.”

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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.”