Bank of Canada Cuts Overnight Rate for Second Time

For the second time in two months the Bank of Canada has trimmed its key overnight lending rate. 

In a move widely expected by markets and economists, the bank of Canada on Wednesday dropped its rate another 25 basis points to 4.5%. The cut follows the initial 25 basis point reduction the Bank announced in June – the first fall in the overnight rate in over four years. 

The case for another rate cut appeared to be cinched with last week’s consumer price index (CPI) from Statistics Canada, which pegged headline inflation for June at 2.7%, down from the hotter-than-expected 2.9% gain in May. 

“Broad inflationary pressures are easing,” the Bank said in its rate announcement today. “The Bank’s preferred measures of core inflation have been below 3% for several months and the breadth of price increases across components of the CPI is now near its historical norm.” 

In a meeting with reporters following today’s rate announcement, Bank of Canada Governor Tiff Macklem suggested additional rate cuts are ahead, if inflation continues to ease toward the Bank’s 2% target as expected. 

The national inflation rate peaked in June 2022 at 8.1% but an aggressive rate-hiking campaign by the Bank eventually got the rate back under 3% by January of this year. 

The Bank admitted today shelter price inflation remains high - driven by rent and mortgage interest costs - and is still the biggest contributor to total inflation. Inflation is also elevated in services that are closely affected by wages, such as restaurants and personal care, it added. 

However, the Bank’s preferred measures of core inflation are expected to slow to about 2.5% in the second half of 2024 and ease gradually through 2025. The Bank said it anticipates CPI inflation to come down below core inflation in the second half of this year, largely because of base year effects on gasoline prices. 

Farm Credit Canada has said it expects the Bank to ultimately cut its overnight rate three times this year, totaling 75 basis points.  

Meanwhile, some economists are now expecting as many as four cuts in 2024. 

The Bank will make its next rate announcement Sept. 4.