Bank of Canada cuts interest rates by 25 BPS, the first in the G7 to do so

Bank of Canada cuts interest rates by 25 BPS, the first in the G7 to do so.

"Let's just enjoy the moment for a bit," said Governor Tiff Macklem at a press conference after announcing that the central bank had reduced rates to 4.75% from 5%, marking the first cut in four years.

Macklem emphasized that the timing of the next cut would depend on whether inflation continued its downward trend and if the economy evolved in line with the bank's expectations.

Some economists predicted the Bank of Canada (BoC) would cut rates again in July, despite financial markets pricing in only a 39% chance of a cut to 4.50% next month.

A majority of economists polled by Reuters had expected Wednesday's rate cut.

In contrast, U.S. inflation remains stickier, and markets anticipate that the Federal Reserve will cut rates only once this year. Economists have questioned whether the BoC risks diverging too much from the Fed.

"There are limits to how far we can diverge from the United States, but we're not close to those limits," Macklem said.

Following the decision, the Canadian dollar pared its early gains and weakened by 0.22% to 1.3708 to the U.S. dollar, or 72.98 U.S. cents.

The BoC joins Sweden's Riksbank and the Swiss National Bank in reducing rates, which have burdened households and businesses amid muted economic growth despite easing price pressures.

The European Central Bank is likely to follow suit on Thursday, according to a Reuters poll.

Inflation in Canada has slowed this year to hit a three-year low of 2.7% in April. While inflation has stayed below 3% for four months in a row, it is still higher than the bank's 2% target.

"If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate," Macklem said, indicating what future reductions could look like. "But we are taking our interest rate decisions one meeting at a time."

"We have increasing confidence that the Bank of Canada will move again in July," wrote Royce Mendes, head of macro strategy for Desjardins Group, in a note.

Andrew Grantham, senior economist at CIBC, also expects a cut in July, adding that he foresees a total of four reductions this year.

The next rate announcement is due on July 24, when the bank will also release its latest quarterly forecasts.

After keeping interest rates at a more than two-decade high of 5% for almost a year, the BoC said indicators for underlying inflation looked increasingly positive.

The bank had increased interest rates by 475 basis points over 16 months until July 2023, and since then had kept them steady at 5%.