Bank of Canada Expresses Confidence in Slowing Inflation, Lowers Key Rate to 4.75 Percent

OTTAWA-The Bank of Canada reduced its policy rate by 25 basis points to 4.75 percent on June 5, claiming its monetary policy no longer needs to be as restrictive.

“We’ve come a long way in the fight against inflation. And our confidence that inflation will continue to move closer to the 2 percent target has increased over recent months,” Bank of Canada Governor Tiff Macklem told reporters.

“The considerable progress we’ve made to restore price stability is welcome news for Canadians.”

With Canada’s inflation rate falling to 2.7 percent in April from 3.4 percent in December, the Bank said it has confidence that inflation will continue falling towards its target of 2 percent.

However, the bank said it is “closely watching” economic markers like wage growth, corporate pricing behavior, and supply and demand for any sign of an uptrend.

“If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2 percent target continues to increase, it is reasonable to expect further cuts to our policy interest rate,” Mr. Macklem said.

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Mr. Macklem warned that lowering interest rates too quickly could jeopardize the progress the Bank had already made on inflation. He said inflation could also rise if global geopolitical tensions escalate, Canadian housing prices rise faster than expected, or if wage growth remains high relative to productivity.

Many economists had anticipated the Bank would lower its interest rates in June, after it decided to keep its base rate stable back in March. At that time, Mr. Macklem said the Bank needed more time to let higher interest rates bring inflation down.

Canada’s economic growth resumed in the first quarter of 2024 after it stalled in the second half of 2023, according to the Bank. It said GDP growth was at 1.7 percent, which was slower than forecast in its Monetary Policy Report released back in April.

Weaker inventory investment dampened Canada’s GDP growth, while consumption growth held steady at 3 percent, and business investment and housing activity went up.

The Bank said labor market data showed that businesses were continuing to hire, while employment was growing at a slower pace than the working-age population.

The global economy also grew by about 3 percent in the first quarter of 2024, according to the Bank. The United States saw its economy grow slower than expected due to weaknesses in exports and inventories, while China had its strong economic growth slightly hindered by weak domestic demand.

The Bank will announce its next overnight rate target on July 24, 2024.