Bank of Canada cuts key interest rate to 4.75% in widely anticipated move. Here’s what’s next

12:45 p.m.

What’s next for monetary policy?

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• The Bank of Canada’s next interest rate decision is on July 24, where it will also publish updated economic forecasts in its quarterly Monetary Policy Report. The following decision is on Sept. 4.
• Statistics Canada will report May inflation data on June 25. It will publish the May Labour Force Survey results on Fri. June 7, and the April GDP numbers on June 28.
• The European Central Bank’s next rate decision is tomorrow, June 6. It is widely expected to start lowering interest rates, which would make it the first globally significant central bank to start easing since rates began to rise in 2022.
• The U.S. Federal Reserve’s next rate decision is on June 12. Markets expect the Fed to remain on hold through the summer, with the first rate cut priced in for September.

– Mark Rendell

12:30 p.m.

How fast will interest rates fall and where will they settle?

With the first interest rate cut out of the way, the key question now is how fast the Bank of Canada will move to lower borrowing costs and where interest rates will settle once the bank gets through its easing cycle.

Governor Tiff Macklem remained tight-lipped about this during the press conference, although he suggested that cuts would likely be “gradual.”

“We’re going to be taking our interest rate decisions one meeting at a time. … The timing of those cuts, or of any further cuts, are going to depend on incoming data and our assessment of what those data mean for the future path of inflation,” Mr. Macklem said.

“Our own forecast has inflation easing gradually back towards the 2 per cent target. So... given that it’s likely to ease gradually, the path for interest rates are likely to be gradual,” he said.

Financial markets interpreted Wednesday’s announcement and Mr. Macklem’s commentary as dovish, upping bets on additional rate cuts this year. Interest rate swap markets, which capture expectations about monetary policy, now put the odds of a rate cut in July at around 40 per cent, according to Refinitiv data. Markets are pricing in two more rate cuts this year.

There are constraints on how far the Bank of Canada can get ahead of the U.S. Federal Reserve on rate cuts. Divergence between the two central banks would put downward pressure on the Canadian dollar, which could push up import prices.

However, Mr. Macklem largely dismissed these concerns: “There are limits to how far we can diverge from the United States, but we’re not close to those limits,” he said.

Looking further ahead, he said it’s unlikely interest rates will get back to the low levels seen in the decade before the pandemic. The highest the policy rate got during that time was 1.75 per cent.

“After the global financial crisis and before COVID hit it was a period of unusually low interest rates. When you look at that today, a number of the forces that resulted in those very low interest rates look to be unwinding,” Mr. Macklem said.

“We don’t have a crystal ball, but … it would be prudent for households and businesses and governments not to plan on interest rates getting back to pre-COVID levels.”

– Mark Rendell

12:11 p.m.

Opinion: How fast and how far for further rate cuts, Bank of Canada?

The Bank of Canada finally pulled the trigger on Wednesday and reduced its policy rate by 25 basis points. Forecasters were split between a June or July cut, but overall, the data were just too strong in favour of a cut – or too weak, as it were, considering the latest GDP numbers.

This marks the beginning of a cycle of easing policy rates. The question for most commentators, investors, and consumers is now: How far and how fast?

The bank cut its policy rate from 5 percent to 4.75 percent. Despite the cut, a strong case can be made that monetary policy is more restrictive now than it was at the Bank of Canada’s last announcement on April 10. This augurs well for further declines in inflation and further rate cuts. Over time, our still above-target inflation – both headline and the bank’s preferred core inflation measures, CPI-Trim and CPI-Median, which strip away volatile components of the price index – should continue to fall back towards the 2 percent target, giving the bank more room to cut.

We say the bank’s monetary policy is more restrictive because what matters is not the nominal policy rate, 4.75 percent, but the real policy rate – the nominal policy rate minus inflation.

Read the full opinion column on today’s BoC decision.

– Jeremy Kronick and Steve Ambler

11:45 a.m.

Opinion: What lower rates will mean for mortgages, housing and returns

The long-awaited interest rate U-turn is finally at hand.

Rates began rising from pandemic lows in March 2022 and have been flat since last summer. We are still very far from unwinding those recent rate hikes, and it’s unlikely that we get back to the old lows. But the trend is clear: Slowly and haltingly, borrowers will pay less and savers will make less.

Here’s a summary of what you need to know following the 0.25 of a percentage point drop in the Bank of Canada’s overnight rate on Wednesday:

Savings rates

Banks and credit union savings account rates reflect a variety of factors like the overnight rate, what’s happening in financial markets and comparisons to competitors. But a drop in the overnight rate sends a clear message to savers – prepare to see declines in rates that are now as high as 4 per cent or so.

Mortgage rates

Rates for mortgages are mainly influenced by what’s happening in the bond market, where expectations of a rate cut by the Bank of Canada have already provided some downward pressure on bond yields. Fixed mortgage rates could follow.

GICs

GIC rates follow the same market trends as mortgages, so get ready for returns to start drifting lower. Yields on one and two-year GICs have held up well lately, with 5 per cent returns still widely available on Wednesday from alternative players. Competition between GIC issuers to attract money may help keep rates in this zone for a while, but the general trend is lower. Procrastinating in buying GICs means foregoing yield.

High interest savings ETFs

These exchange-traded funds hold their assets in big bank savings accounts paying much better rates than retail clients can get – about 4.8 per cent as of earlier this week. HISA ETFs tracked each increase in the overnight rate - expect the opposite now that rates are falling. “If the Bank of Canada cuts by 25 basis points, you would expect to see the rate of those ETFs go down by the same amount,” said Naseem Husain, senior vice-president and ETF strategist at Global X Canada. Expect a rate adjustment within 24 hours of the Bank of Canada’s rate change.

Similar rate cuts are likely for investment savings accounts, an alternative to HISA ETFs. Investment savings accounts are packaged like mutual funds and typically can be traded at no cost, compared to commissions of up to $10 for buying and selling HISA ETFs.

Here’s what else you need to know about lower interest rates.

– Rob Carrick

11:30 a.m.

For borrowers, the question is how quickly and deeply will the central bank cut

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The math is clear: A single Bank of Canada interest rate reduction of a quarter of a percentage point will have only a minimal impact on debt payments for many people. Real relief for borrowers hinges on how many more rate cuts will follow and how quickly.

When I crunched the numbers earlier this week, I found Canadians in many common situations will save less than $100 a month. And that small help will only go to those with floating-rate debt, which includes adjustable- and variable-rate mortgages as well as lines of credit.

To boot, anyone with a variable-rate mortgage won’t see any immediate difference in their budget. That’s because their monthly instalments will stay the same until the end of the term. Instead, lower borrowing costs simply mean more of the payment is applied to the principal rather than the interest part of the mortgage, which reduces the amount owing more quickly.

The issue now is how long it will take for further rate reductions that, cumulatively, would make a more palpable difference to stretched-out borrowers. For the moment, though, that question seems wide open.

In early 2020, the cuts came fast and furious as the Bank of Canada rushed to soften the economic shock of the pandemic disruptions. In 2007 and 2008, the central bank also slashed rates quickly as the world grappled with the global financial crisis. And even in 2015, when it cut rates just twice in the span of about six months, the country was dealing with an oil-price slump that hammered Alberta and Newfoundland and Labrador.

Today, the economy is, if not humming, at least stammering along. The Bank of Canada is worried about the trajectory of inflation more than a recession. And while financial markets expect a couple more cuts by the end of the year, they’re about evenly split about whether the central bank will lower rates again at its next meeting in July.

In other words, borrowers with floating rates have reason to continue to watch with bated breath what the Bank of Canada does and says.

That also holds for those hoping to sign up for or renew a fixed-rate mortgage soon. While those rates don’t move in tandem with the central bank’s key rate, they are influenced by the bond market.

If the Bank of Canada were to sound more aggressive than investors expect about the pacing or magnitude of future rate cuts, fixed-mortgage rates will likely decline.

– Erica Alini

11:20 a.m.

Economists react to Bank of Canada’s rate cut

Here’s a snapshot of what economists are saying after today’s decision:

Royce Mendes, managing director and head of macro strategy, Desjardins Securities

Officials unequivocally stated that if inflation continues to ease, it’s reasonable to expect further cuts. That’s more explicit guidance than we had anticipated. As a result, we have increasing confidence that the Bank of Canada will move again in July. Even with consistent 25bps moves, this cutting cycle will be more gradual than previous iterations. It will also be less pronounced, should the economy avoid a hard landing.

The rate decision today is consistent with our view that policymakers want to get ahead of the coming mortgage renewal wall in 2025. … A cooler U.S. economy and a planned slowdown in population growth reinforce the need to get rates down to roughly 3.5 per cent by the middle of next year.

Stephen Brown, deputy chief North America economist, Capital Economics

Today’s interest rate cut from the Bank of Canada will be the first of many, and the dovish tone of the accompanying communications suggests that another rate cut in July is already nailed on. For now, our forecast is that there will be three more 25 bp cuts this year, implying that the bank will pause at one of its meetings, but if anything the odds seem to favour cuts at every meeting.

In short, absent a big upside surprise to CPI in the next two releases before the late July policy meeting, the bank will cut again next month. Our view remains that the bank will cut the policy rate to 4 per cent this year, lower than the 4.3 per cent year-end rate implied by markets ahead of the meeting, with further loosening to come in 2025.

Douglas Porter, chief economist, BMO Capital Markets

The first cut may not necessarily be the deepest, but it is the most significant, as it marks the official turning point after more than two years of restrictive policy. This is indeed likely to be the first of a series of cuts, although that series is not going to be a straight line down by any means. The bank’s tone is a bit more dovish than expected, but each and every cut this year will require evidence that inflation is calming.

James Orlando, director and senior economist, TD Bank

We believe that the path forward for the BoC is going to be slow. It has acknowledged that the economy doesn’t need such high interest rates any longer. At the same time, it will proceed cautiously. It must ensure that inflationary pressures don’t rebound like they have in the U.S. in recent months. It also doesn’t want to reignite the housing market, where prospective buyers have been waiting for greater interest rate certainty. We expect the BoC is on a cut-pause-cut path, with the next cut likely occurring in September. This outlook will cause the BoC to diverge significantly from the Fed, which is likely to put greater pressure on the loonie over the coming months.

Read more on how markets and economists are reacting to today’s Bank of Canada decision.

– Darcy Keith

11:14 a.m.

Macklem on the neutral rate

“I don’t think Canadians should spend a lot of time thinking about the neutral rate. The neutral rate is a theoretical concept. It’s something we need in our models. The neutral rate is where the policy rate would settle in the long run, when the output gap is closed, inflation is back to target, and there are no new shocks. In other words, we’ll never get there. There’s always going to be new shocks. There’s always going to be new events.”

In April, the central bank raised its neutral rate – the theoretical level at which rates are neither stimulating nor restricting the economy – by a quarter-percentage-point to a range of 2.25 per cent to 3.25 per cent.

– Matt Lundy

11:05 a.m.

Will Bank of Canada rate cut return lustre to dividend stocks?

Dividend investors, your time has come. Well, maybe.

The Bank of Canada cut its key interest rate this morning by a quarter of a percentage point, marking the first turn in monetary policy in more than two years.

This one cut, which follows 10 consecutive rate hikes since early 2022, might not be enough to trigger a rally in dividend-paying stocks right away. However, it bolsters the view that the single biggest drag on these stocks over the past two years is about to let up.

If the central bank follows this rate decision with more rate cuts later in the year, as the threat of inflation subsides or economic clouds gather, all the better.

Dividend-paying stocks have been struggling over the past two years as rising interest rates attracted investors to other income-generating investments, such as bonds and guaranteed investment certificates (GICs).

The difference between the performance of dividend stocks and the broader market is striking.

Read more on how today’s Bank of Canada decision is affecting dividend stocks.

– David Berman

10:58 a.m.

Macklem on the economic outlook

“So far, it is looking like a soft landing. The plane hasn’t landed yet, so we’re not cheering yet. But I would say the runway’s in sight.”

– Matt Lundy

10:53 a.m.

Macklem on divergent interest rate path from U.S.

“In Canada, we have our own currency. We have a flexible exchange rate. And what that means is that we can gear monetary policy to the needs of the Canadian economy. So we don’t need to move in lockstep with the Federal Reserve. … There are limits to how far we can diverge from the United States, but we’re not close to those limits.”

– Matt Lundy

10:50 a.m.

Macklem: BoC will take interest rate decisions ‘one meeting at a time’

“We’re going to be taking our interest rate decisions one meeting at a time. … The timing of those cuts, or of any further cuts, are going to depend on incoming data and our assessment of what those data mean for the future path of inflation.”

“I know this is welcome news to many Canadians. I also know everybody wants to know where are we headed. That is going to depend on how things evolve. What I can say is that if the economy continues to evolve broadly as we expect, and we continue to see a broad easing in inflationary pressures, it is reasonable to expect further cuts in our policy rate. But, and I want to stress this, the timing of any further cuts is going to depend on incoming data.”

– Matt Lundy

10:40 a.m.

Key quotes from Macklem’s press conference opening statement

Progress against inflation

“We’ve come a long way in the fight against inflation. And our confidence that inflation will continue to move closer to the 2 per cent target has increased over recent months. The considerable progress we’ve made to restore price stability is welcome news for Canadians. Since our Monetary Policy Report in April, underlying inflation has continued to ease and economic growth has resumed. With the economy in excess supply, there is room for growth even as inflation continues to recede.”

What’s happening to the economy?

“After stalling in the second half of last year, economic growth picked up in the first quarter of this year. At 1.7 per cent, growth was lower than projected in the April report. But consumption growth was solid at about 3 per cent, and business investment and housing activity also increased. In the labour market, businesses are continuing to hire workers. Employment has been growing, but at a slower pace than the working-age population. This has allowed the supply of workers to catch up with job vacancies. Elevated wage pressures look to be moderating gradually.”

The inflation picture

“Inflation remains above the 2 per cent target and shelter price inflation is high. But total consumer price index (CPI) inflation has declined consistently over the course of this year, and indicators of underlying inflation increasingly point to a sustained easing. I’ll highlight four indicators in particular:

• CPI inflation has eased from 3.4 per cent in December to 2.7 per cent in April
• Our preferred measures of core inflation have come down from about 3.5 per cent last December to about 2.75 per cent in April
• The three-month rates of core inflation slowed from about 3.5 per cent in December to under 2 per cent in March and April
• The proportion of CPI components increasing faster than 3 per cent is now close to its historical average, suggesting price increases are no longer unusually broad-based.”

What’s next for monetary policy?

“If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2 per cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate. But we are taking our interest rate decisions one meeting at a time. We don’t want monetary policy to be more restrictive than it needs to be to get inflation back to target. But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made. Further progress in bringing down inflation is likely to be uneven and risks remain. Inflation could be higher if global tensions escalate, if house prices in Canada rise faster than expected, or if wage growth remains high relative to productivity.”

– Mark Rendell

10:33 a.m.

Macklem’s opening statement outlines probable path for interest rates

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If Canadians are looking for an indication of where interest rates are heading, it’s near the bottom of Bank of Canada Governor Tiff Macklem’s opening statement.

“If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2-per-cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate,” Mr. Macklem said in prepared remarks that explained the bank’s rationale for trimming those rates to 4.75 per cent from 5 per cent.

“But we are taking our interest rate decisions one meeting at a time,” he added. Then a couple sentences later: “If we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made.”

The key takeaway for consumers: slow and steady is how this process of policy easing will play out.

This is not the first time that Mr. Macklem has laid out the probable path for interest rates. Speaking to the House of Commons finance committee last month, he said rates were unlikely to return to the rock-bottom levels of the 2010s.

This gradual process of lowering rates will also be something of a departure from recent experience.

Rate cuts will be “both more gradual and less pronounced than any of the rate-cutting cycles in recent decades,” Royce Mendes, head of macro strategy at Desjardins Securities, told The Globe on Tuesday.

“Typically, when the Bank of Canada is cutting rates, the economy is in the midst of a recession, and rates are coming down quite quickly,” he added.

The Canadian economy is hardly in stellar shape. While the country has avoided a recession, as it’s typically defined, it has recently contracted in per-capita terms. The unemployment rate is rising, as are personal insolvencies.

Still, there are upside risks to the inflation outlook, as Mr. Macklem outlined in his statement. Global conflicts could escalate or Canada’s dormant real estate market could ignite, to name just two.

This is undoubtedly a turning point for the Canadian economy, and one that will be celebrated by debtors. But it may be too early to break out the champagne.

– Matt Lundy

10:25 a.m.

BoC rate cut expected to generate ‘material lift’ in home sales

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The real estate industry believes that today’s interest rate cut will help usher in some confidence to the housing market and bring homebuyers out again.

Activity has been mostly slow during the central bank’s two-year rate hiking campaign to cool runaway inflation. Home sales have been consistently below the 10-year average and the sentiment among buyers has been one of caution.

Realtors and mortgage brokers say their clients have told them that they have been waiting for the Bank of Canada to start cutting interest rates.

Phil Soper, the president of Royal LePage, said he expects today’s 25-basis-point cut and stronger consumer confidence will generate a “material lift” in sales and “accelerated home appreciation.”

“It’s been four long years since Canadians have experienced a policy-driven drop in the cost of borrowing,” he said.

Since the beginning of this year, more homeowners have been putting their properties up for sale. Listings have climbed, giving prospective buyers more options.

If this rate cut does indeed boost buyer confidence, competition could start to increase and push home prices up again.

The typical home price across the country has remained steady for months, according to data from the Canadian Real Estate Association.

Home values are about 10 per cent below peak prices in February, 2022, before the central bank started raising interest rates.

– Rachelle Younglai

10:20 a.m.

Analysis: Five things that will change as interest rates fall

Here are five things that will change as interest rates fall:

• Variable-rate mortgages are out of the penalty box: Borrowing costs on variable-rate mortgages change with the Bank of Canada’s overnight rate, which surged higher in 2022 and 2023. Now, the overnight rate is falling. One complication for variable-rate mortgages: Rates are still about one percentage point higher than the popular three-year fixed mortgage.
• Fixed-rate mortgages have room to fall: Rates on fixed mortgages do not track the overnight rate – they are more influenced by rates in the bond market, which have been moving lower lately. Well-discounted three- and five-year mortgages are now available in the 4.9-per-cent range. Watch for better than that.
• Lower returns for seniors and others who depend on savings and investment products that won’t lose money: Returns will drift lower, though nothing close to the near-zero levels of a few years ago. Locking money into guaranteed investment certificates paying 5 per cent for a year or two might look like a smart move in a few months.
• Cheaper vehicle financing: Demand for new cars, SUVs and trucks is starting to slow down from the intense levels of the past year or so, and that means more competitive financing offers. The Bank of Canada’s rate move clears more room for lower financing rates.
• Bonds and rate-sensitive dividend stocks are out of the penalty box: Rising rates crush bonds and dividend stocks in sectors like utilities, pipelines and telecom. Lower rates will help create more favourable sentiment toward these investments.

And, three things that won’t change:

• Credit card interest rates will remain at 20 per cent or more.
• Home equity lines of credit will remain an expensive way to borrow, even if the cut in the Bank of Canada’s overnight rate will lower their interest rate a tiny bit.
• Most brokerage accounts will continue to pay zero interest on uninvested money.

– Rob Carrick

10:07 a.m.

Canadian dollar, short-term bond yields tumble following BoC rate cut

The Canadian dollar and short-term bond yields immediately tumbled as the Bank of Canada announced its 25-basis-point cut. The loonie lost about two-10ths of a US cent, trading at 72.95 US cents as of 9:48 am ET. The two-year Canada bond yield, which is particularly sensitive to central bank moves, lost about four basis points and is now retesting support at 4 per cent. Its spread widened against the U.S. two-year bond, which was only down about one basis point to 4.76 per cent.

The S&P/TSX Composite Index added to its earlier gains, up about half a percentage point at last check. It opened up about 0.3 per cent.

Money markets were pricing in close to 80 per cent odds this morning that the bank would cut at today’s meeting, so such a move was not fully priced into markets.

Markets and economists react to BoC: Another cut in July is no given

Now attention turns to the July meeting. Current swaps pricing suggests another quarter-point cut at that meeting is not a given. At 9:55 am ET, swaps pricing showed about 40 per cent odds of another cut in July, although it showed odds of as high as 55 per cent immediately following the news, according to LSEG data. Put simply, markets are giving pretty even odds that another cut will arrive in July.

By December, a full 75 basis points of cuts are now priced into money markets.

– Darcy Keith

9:45 a.m.

Bank of Canada cuts policy rate to 4.75 per cent

The Bank of Canada cut its benchmark interest rate by a quarter-percentage-point, lowering borrowing costs for households and businesses for the first time in four years and marking a turning point for the Canadian economy after the biggest inflation and interest-rate shock in decades.

The central bank’s governing council lowered the policy rate to 4.75 per cent from 5 per cent, a two-decade high reached last summer after 10 rapid-fire rate hikes.

“With further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive,” Governor Tiff Macklem said, according to the prepared text of his press conference opening statement. “In other words, it is appropriate to lower our policy interest rate.”

The highly anticipated move won’t do much, by itself, to reduce monthly payments on mortgages, car loans or lines of credit. But it kickstarts a monetary policy easing cycle that should see interest rates fall further in the coming quarters, offering some relief to borrowers with floating-rate debt, homeowners facing mortgage renewals and indebted governments.

It could also breathe life back into the Canadian real estate market, which has stagnated over the past two years as would-be buyers have had trouble qualifying for mortgages and sellers have held off listing owing to uncertainty about the trajectory of the market.

“If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2-per-cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate. But we are taking our interest rate decisions one meeting at a time,” Mr. Macklem said.

The Bank of Canada is the first G7 central bank to start easing monetary policy. The European Central Bank is expected to follow suit on Thursday, while the U.S. Federal Reserve, which is dealing with a stronger economy and more stubborn inflation, is expected to hold off rate cuts until later in the year.

Read the full story on today’s BoC rate announcement.

– Mark Rendell

9:15 a.m.

Potential Bank of Canada rate cut would jolt slow housing market, experts say

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A Bank of Canada interest rate cut could give Canada’s slow housing market a jolt, as prospective buyers gain confidence that borrowing costs are on the decline.

Many buyers have been delaying their house hunting in anticipation of an interest rate cut, which will also have implications for those with car loans and lines of credit.

But any mortgage payment relief will be relatively small at first, as the central bank is expected to cut rates slowly in the coming quarters, and many would-be buyers will remain priced out of the market.

Greater Toronto home sales down in May, but Bank of Canada decision could spur demand

Since mid-2022, activity in the country’s real estate market has been mostly weak with sales consistently below the 10-year average. Homeowners have had to deal with the highest borrowing costs in years and would-be buyers have been cautious about making purchases because of uncertainty over the direction of interest rates.

The real estate industry believes that a possible cut would encourage buyers to wade back in.

Read more on how a rate cut could affect Canada’s housing market.

– Rachelle Younglai and Mark Rendell

8:45 a.m.

Timeline of Bank of Canada’s previous interest rate decisions

The Bank of Canada slashed its benchmark interest rate to an emergency-low of 0.25 per cent in March, 2020 in response to the COVID-19 pandemic. It kept the policy rate at rock-bottom for two years, then started raising it rapidly to tackle runaway inflation. Between March 2022, and July 2023, the central bank hiked rates 10 times, bringing the policy rate to 5 per cent, where it has remained since last summer.

Here’s a timeline of the key events.

– Globe staff

8:10 a.m.

Bay Street expects the BoC to cut

Bay Street economists and traders are looking for the Bank of Canada to start cutting interest rates this morning, following a raft of surprisingly good inflation data and a worse-than-expected GDP report last week.

Interest rate swap markets, which capture expectations about monetary policy, are pricing in a 74 per cent chance that the central bank lowers its benchmark rate by a quarter-percentage point to 4.75 per cent, according to Eikon data. The number was closer to 85 per cent earlier this week. Market pricing was closer to a coin toss last week, but sentiment swung in favour of a cut after Statistics Canada reported on Friday that the economy grew less than expected in the first three months of the year.

Most Bay Street analysts are in agreement with markets. Twenty-two out of 29 economists polled by Reuters last week said they expected a quarter-point rate cut on Wednesday. Six thought the BoC would remain on hold until July, while one penciled in a first rate cut in September.

Looking further ahead, swap markets have fully priced in only two quarter-point rate cuts this year, which would bring the BoC policy rate to 4.5 per cent. A majority of analysts, by contrast, see three rate cuts by December, according to the Reuters poll.

– Mark Rendell

7 a.m.

Bank of Canada interest rate cut on the table

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After the Bank of Canada’s last rate decision in April, Governor Tiff Macklem hailed the progress being made on inflation and said that an interest rate cut in June was “within the realm of possibilities.”

This morning, Canadians will see if the central bank pulls the trigger and starts the long-awaited process of lowering borrowing costs for households and businesses.

The rate announcement is at 9:45 a.m. followed by a press conference by Mr. Macklem and senior deputy governor Carolyn Rogers at 10:30 am.

Most Bay Street economists and traders expect the bank to lower its policy rate to 4.75 per cent from 5 per cent. That would be the first rate cut since the early months of the COVID-19 pandemic, and a historic turning point after the most forceful monetary policy tightening cycle on record, which saw the bank raise interest rates 10 times between March, 2022, and July, 2023.

The case for a rate cut is increasingly clear. The annual inflation rate has been below 3 per cent for four consecutive months, hitting 2.7 per cent in April, down from a peak of 8.1 per cent in 2022. That’s still above the bank’s 2-per-cent target, but back within its target range and heading lower.

Meanwhile, the negative effects of restrictive interest rates are plain to see. Canadians have cut back on spending to cope with higher mortgage and other debt-servicing costs, business investment is weak and unemployment is rising. The Canadian economy has barely grown over the past year, and it actually shrunk on a per capita basis.

Adding it up, it’s hard to justify keeping the policy rate at 5 per cent for much longer. Inflation is no longer a severe threat and monetary policy needs to start normalizing to cushion the impact of mortgage renewals coming up over the next two years and to prevent the economy from falling into a recession.

However, there’s still a chance the Bank of Canada’s governing council will punt one more time, and use today’s decision to set up the first rate cut in July.

That would surprise markets and disappoint many Canadians, especially homeowners facing mortgage renewals in the near-term. But it would give the bank more time to ensure inflation is moving sustainably lower, reduce the risk that home prices surge, and prevent the BoC from getting too far ahead of the U.S. Federal Reserve on monetary policy easing, which could put downward pressure on the Canadian dollar.

Read more about today’s Bank of Canada announcement.

– Mark Rendell