Bank of Canada Decreases Interest Rates for the First Time in Four Years

The Bank of Canada announced a decrease in its interest rates after keeping it steady at 5% since August last year. The reduction of a quarter percentage point to 4.75% marks the first cut in over four years, a move that was eagerly anticipated by many households and businesses. The impact of the interest rate hikes on mortgages, investment capability, and overall economic strength has been keenly felt across the board.

The Bank of Canada’s overnight rate directly influences short-term loans and deposits with financial institutions, consequently affecting all commercial rates, from mortgage rates to consumer loans. This adjustment is a significant tool employed by the central bank to influence consumer and business behavior to keep inflation around its 2% target range.

Royce Mendes, Desjardins, and Avery Shenfeld had indicated during the week that the timing was right for the first interest rate cut in Canada, with economic pressures aligning well. The country’s total inflation now stands at 2.7%, the lowest since March 2021, and core inflation indicators are comfortably within the target range set by the Bank.

Market analysts had predicted this move, with two out of three expecting the Bank to reduce the rate from 5% to 4.75%. It is the first cut since the shock of the COVID-19 pandemic necessitated a sudden 1.75% drop to 0.25% over four years ago. The rate remained at this floor level until a surprising inflation surge forced a sharp reversal in direction, bringing the Bank’s rate back up to 5% from March 2022 to August of last year.

The decision to lower interest rates indicates a shifting approach by the Bank of Canada in response to improving economic conditions and inflation outcomes. Governor Tiff Macklem affirmed the progress made in inflation control, showing confidence in inflation trends aligning with the 2% target. Experts at the C.D. Howe Institute predict further rate cuts to potentially reach 4.25% by year-end and settle around 3.5% within a year.