Bank of Canada Cuts Key Rate to 4.5 Percent, Says Further Cuts ‘Reasonable to Expect’

Governor of the Bank of Canada Tiff Macklem speaks during a news conference on the Bank of Canada's rate announcement in Ottawa on June 5, 2024. (The Canadian Press/Justin Tang)

OTTAWA—The Bank of Canada cut its interest rates for the second time in 2024, bringing its key rate to 4.5 percent.

The Bank of Canada reduced its 4.75 percent benchmark interest rate by 25 basis points on July 24, noting that core inflation has been below 3 percent for several months.

“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate,” Bank of Canada governor Tiff Macklem told reporters.

Mr. Macklem said the bank lowered the rate because its monetary policy has been successful in easing high prices, and Canada’s economy now has “more room to grow without creating inflationary pressures.” The key rate had been at 5 percent since July 2023.

The central bank said Canada’s annual inflation rate fell to 2.7 percent in June after increasing slightly to 2.9 percent in May. This was down from 3.4 percent back in December 2023.

Mr. Macklem said the bank expects inflation to moderate further, “though progress over the next year will likely be uneven.” This is because the overall weakness in Canada’s economy is pushing inflation down while price increases in shelter and some services are keeping inflation elevated.

“The push-pull of these opposing forces means the decline in inflation will likely be gradual, and there could be setbacks along the way,” Mr. Macklem said.

“The timing will depend on how we see these opposing forces playing out. In other words, we will be taking our monetary decisions one at a time.”

The bank foresees Canada’s core inflation slowing to around 2.5 percent in the second half of 2024 and “sustainably reach the 2 percent target in the second half of 2025,” according to its monetary policy report released on July 24 along with its interest rate announcement.

When it comes to Canada’s GDP, the central bank forecasts that growth will be 1.2 percent in 2024, 2.1 percent in 2025, and 2.4 percent in 2026, the report said.

Further Rate Cuts

The Bank of Canada began raising its interest rates in March 2022, hiking its key rate to 0.5 percent after having kept it at 0.25 percent for two years. This was in response to high inflation numbers following the COVID-19 pandemic, which were exacerbated by the disruption of global supply chains and increased government stimulus.

Inflation jumped from 3.1 percent in June 2021 to 7.6 percent in July 2022, resulting in the bank raising interest rates from 0.25 percent to 2.5 percent over the same period.

In June 2024, the bank lowered its interest rate for the first time in more than four years, to 4.75 percent. It said its monetary policy did not need to be as “restrictive” thanks to its successful efforts in fighting inflation and restoring price stability.

Canada’s economic growth rose to 1.5 percent in the first half of 2024, but despite it having picked up, it remains weak relative to population growth during that period, at around 3 percent, according to the July monetary policy report.

However, the economy is expected to strengthen in the second half of 2024, while population growth is projected to slow due to new limits on arrivals of temporary residents.

The bank said household spending has been declining, demand for both vehicles and travel abroad has faded, and many families are setting aside more money for debt payments. It also noted that a tight housing supply and labour cost growth are expected to keep inflation elevated.

In addition, the central bank said the global economy is expected to continue increasing by around 3 percent through 2026, with inflation easing gradually in most advanced economies. It noted that geopolitical uncertainty remains high, which could potentially impact its inflation outlook.

The bank will announce its next interest rate target on Sept. 4, 2024.