Bank of Canada interest rate announcement: BoC cuts rates for first time since 2020

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on Jun 5, 2024
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  • The Bank of Canada (BoC) has just announced its latest interest rate decision.
  • For the first time in almost half a decade, the country will cut interest rates.
  • The Canadian interest rate is now down from 5% to 4.75%.

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Today, the Bank of Canada (BoC) communicated its latest interest rate decision on the target for the overnight rate.

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Markets were on tenterhooks, expecting the first major market’s interest rate cut in over four years from Canada, potentially followed soon afterwards by the European Central Bank (ECB).

Just minutes ago, the Canadian central bank announced that it had decided upon a rate cut of 25 basis points, i.e. a quarter of a percentage point.

This effectively brings the Canadian interest rate down from 5% to 4.75%, and is the country’s first rate cut since before the 2020 pandemic began.

Cautious outlook amid cuts

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On today’s decision, the BoC said that:

With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain.”

Market’s expectations

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The decision was broadly in line with market expectations, according to most experts.

Analysts the world over were expecting the BOC to announce a 25 basis points (a quarter of a percentage point) interest rate cut today.

Market reactions

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Needless to say, the markets welcomed the announcement with open arms.

“A rate cut is desperately needed,” said The Real Economy Blog’s Tu Nguyen ahead of the decision announcement. “Any further delay, and the bank would risk making a policy error and undermining Canada’s growth outlook.

A 25-basis-point rate cut would kickstart the easing cycle, which will unfold gradually over the next year and a half, and mark the start of a return to a post-pandemic economy.”

Why did Canada cut its interest rate?

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The reason for today’s rate cut is almost certainly an attempt to stimulate economic growth for the nation amid continuing downward pressure on Canada’s GDP.

As the BoC noted today: “Canada’s economic growth resumed in the first quarter of 2024 after stalling in the second half of last year. At 1.7%, first-quarter GDP growth was slower than forecast in the MPR. Weaker inventory investment dampened activity. Consumption growth was solid at about 3%, and business investment and housing activity also increased. Labour market data show businesses continue to hire, although employment has been growing at a slower pace than the working-age population. Wage pressures remain but look to be moderating gradually. Overall, recent data suggest the economy is still operating in excess supply.”

The decision today also left the door open for hope that the European Central Bank (ECB) would announce its own interest rate cut, the first in five years, since 2019, tomorrow on June 6th.

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