The Bank of Canada considered holding off its benchmark interest rate cut until July but opted to make the change this month thanks to favourable inflation reports, according to the bank’s newly released summary.
Canada’s central bank announced June 5 that its key rate would drop from 5 percent to 4.75 percent, the first cut since March 2020.
Governor Tiff Macklem said at the time that Canada had “come a long way in the fight against inflation,” but a newly released summary of deliberations suggests the bank’s decision was not an easy one.
The summary says the bank’s six-person governing council analyzed the risks of cutting rates too soon versus waiting too long.
“In discussing these risks, members placed different weights and likelihoods on each. Some members were more focused on the downside risks to inflation stemming from a weak economy and the continued effects of restrictive monetary policy,” the summary said. “Others put more weight on the upside risks associated with persistence in wage growth and the potential for a housing market rebound.”
The council considered waiting for additional monthly Consumer Price Index (CPI) data to “gain further assurance” before cutting the policy rate in July, the summary said.
The annual pace of CPI inflation has been less than 3 percent since the beginning of 2024, after hitting a high of 8.1 percent in 2022. Inflation sat at 2.7 percent in April down from 3.4 percent last December.
“While they recognized the risk that progress could stall—as it had in the United States—there was consensus that with four consecutive months of easing in core inflation and indicators suggesting continued downward momentum, there had been sufficient progress to warrant a first cut in the policy rate,” the summary added.
The council agreed that if inflation continues to move closer to the bank’s 2 percent target in the coming months, it would be “reasonable to expect further cuts to the policy interest rate.”
The summary noted the central bank will be cautious in its approach, however, and plans to take future interest rate decisions “one meeting at a time.”
Rate Cut Impacts
While the decision signals the start of an easing cycle for the Bank of Canada, experts say one interest rate cut won’t have a major effect on the economy or affordability, but the housing market is expected to rally after a significant slowdown in recent months.“The rate decrease won’t materially impact mortgage costs today, but the start of a downward trend may inspire new buyers to ramp up their home search efforts as confidence in the economy grows,” the Royal Bank of Canada (RBC) said in a note to customers after the rate decrease.
RBC noted that while the interest rate reduction is good news, many mortgage holders renewing in the next six to 12 months will still feel the impact of higher rates compared to their current mortgage term.
The central bank’s summary noted the likelihood the rate cut could reignite the housing market, adding that the governing council will be keeping an eye on how population growth continues to affect the housing market, the economy, and inflation.
“The timing and impact of government plans to unwind the rapid growth in non-permanent residents could affect the forecast for inflation and growth,” the summary said.
Ottawa has said it plans to limit temporary residents in the country to 5 percent of the country’s total population.
Despite the central bank saying it will be cautious in future reductions, TD Bank is forecasting another rate cut will occur sooner rather than later.
“We expect the BoC isn’t done,” TD economist James Orlando wrote in a note to investors. “We have the central bank cutting twice more in 2024, before continuing the cutting cycle throughout 2025.”
The Bank of Canada will have two more inflation reports to consider before its next interest rate decision set for July 24.
