Bank of Canada cuts key interest rate to 4.5%

On Wednesday, the Bank of Canada reduced its benchmark interest rate by a quarter of a percentage point, marking the second consecutive cut in its current easing cycle.

The central bank's policy rate, which significantly impacts borrowing costs nationwide, now sits at 4.5 percent.

This move was anticipated by many economists as inflation continues to cool and the Canadian economy shows signs of weakening.

Bank of Canada Governor Tiff Macklem stated in prepared remarks on Wednesday that he expects inflation to continue slowing, even as the central bank predicts economic growth will pick up in the latter half of the year.

"We are increasingly confident that the necessary conditions to bring inflation back to target are in place," he said.

Since the central bank started raising its policy rate in March 2022, higher interest rates have increased borrowing costs for Canadians, businesses, and governments, curbing spending to control historically high inflation.

Macklem reiterated on Wednesday that future rate decisions will depend on the latest economic data and the Bank’s governing council's expectations regarding inflation.

"If inflation continues to ease in line with our forecast, further policy interest rate cuts can be expected," he said. "The timing will depend on how we perceive these opposing forces playing out. Essentially, we will make our monetary policy decisions one at a time."

Inflation cooled to 2.7 percent in June, a development that many economists believe solidified the decision for consecutive rate cuts.

Despite expectations for continued easing of price pressures, the Bank of Canada raised its year-end inflation forecast in an updated Monetary Policy Report also released on Wednesday.

Annual inflation is now projected to average 2.4 percent in the fourth quarter of 2024, up from the 2.2 percent forecast in April. Inflation is now expected to be slightly below previous estimates by the end of 2025 and 2026, aligning with the central bank’s two percent target.

Macklem acknowledged on Wednesday that setbacks are likely on the path to achieving two percent inflation.

He noted that inflation remains high in the shelter component as many Canadians face rising rents and steep mortgage renewal costs. Wage growth, another area of concern for the Bank of Canada, remains high but has shown signs of easing recently, the central bank observed.

The second rate cut in as many months will immediately impact Canadians with variable-rate debt, including some mortgages and home equity lines of credit.