Bank of Canada Makes First Cut to Key Interest Rate Since 2020

The Bank of Canada (BoC) announced on Wednesday(June 5) that it is reducing its benchmark lending rate by 25 basis points to 4.75 percent. The cut is the central bank's first since March 2020.

The move was widely expected by analysts and came after the release of key GDP and inflationary figures.

Data indicates that Canada's GDP grew by 1.7 percent during the first quarter of the year after stalling out at the end of 2023, but is still lagging behind the global growth rate of 3 percent. Meanwhile, the country's consumer price index cooled further in April as it came in at 2.7 percent, inching closer to the BoC’s target rate of 2 percent.

The BoC raised its key overnight rate to 5 percent in March 2022 to combat the effects of rising inflation due to stimulus efforts and supply chain constraints owing to the COVID-19 pandemic.

In its announcement on Wednesday, the central bank acknowledged that risks within the economy remain, and said it will be closely watching relevant numbers to determine future policy adjustments. It suggested that the governing council will work to find balance in its policy and restore price stability within the Canadian economy.

This latest change comes ahead of renewals for many Canadian homeowners who signed on to fixed-rate mortgages before the pandemic, when rates were less than 2 percent. With more than 70 percent of fixed-rate mortgages up for renewal in the next two years, the housing market may be a contributing factor in future decisions by the BoC.

The cut also means a divergence in rate policy between the BoC and the US Federal Reserve, which is expected to continue holding interest rates steady until September at the earliest. This difference has been attributed to a more resilient economic situation and stalled inflation data through the start of the year.

The news caused the Canadian dollar to sink to two week lows, losing more than a quarter of a cent below the US$0.73 mark in early morning trading on Wednesday. The BoC's next rate announcement is scheduled for July 24.

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Securities Disclosure: I, Dean Belder, hold no direct investment interest in any company mentioned in this article.