The Bank of Canada Cuts Interest Rates for the First Time in 4 Years

The Bank of Canada cut its key lending rate by 25 basis points to 4.75%, the first rate cut since March 2020. The central bank said that further interest rate cuts were on the table should inflation continue to ease.

The Bank of Canada was the first central bank among G7 nations to announce a reduction in interest rates. The U.S. Federal Reserve was expected to announce as many as six interest rate cuts in 2024, but because of strong economic data, the Fed may wait until 2025 to announce its first interest rate cut.

Where Are Interest Rates At?

In April, inflation rang in at 2.7%, moving closer to the Bank of Canada’s 2% goal, which prompted economists to predict the June rate cut. In addition to cooling inflation, the Canadian economy remains fragile, with April’s gross domestic product (GDP) coming in at 1.7%, which is weaker than expected and far below the Bank of Canada’s estimate of 2.8%. This additional data further increased the odds of a June interest rate cut.

With inflation decelerating and economic growth anemic, it is widely expected that the Bank of Canada will lower interest rates by a further 25 basis points when it meets next on July 24. Two more rate cuts could come after that before the end of the year. That would take interest rates down to 4.0%.

A rate reduction of 100 basis points, or 1%, would leave interest rates at 4%. A big drop from the start of 2024, but still the highest level since 2006.

The Bank of Canada slashed its overnight lending rate to a low of 0.25% in March 2020 in an effort to avoid a recession in light of the COVID-19 pandemic.

In July 2020, the Bank of Canada governor Tiff Macklem told Canadians not to worry because “rates [would] be low for a long time.”

They weren’t. Inflation started to soar and between March 2022 and July 2023, the Bank of Canada raised rates 10 times, to a high of 5%. It has stayed at this level since last summer.

How Will Interest Rate Cuts Impact Canadians?

How much will a 25-basis point cut impact Canadians? For cash-strapped Canadians dealing with high inflation, a rate cut is a welcome event, but the overnight lending rate is still high, at 4.75%.

Unfortunately, it won’t make a big difference when it comes to monthly loans, credit, and mortgage payments. At least not yet. With the first interest rate cut, Canadians could see savings of less than $100 per month. It should be noted too that it could take anywhere from six to 18 months for Canadians to begin to feel the impact of rate cuts.

On the plus side, the central bank has signalled that it is confident the Canadian economy is moving in the right direction. Should inflation continue to decline, the Bank of Canada said it’s “reasonable to expect further rate cuts.”

Further rate cuts could help consumer spending to rebound. Interest rate cuts could also bring potential homebuyers back into the market. Immediately after the Bank of Canada announced its June rate cut, the country’s biggest banks began to cut their lending rates. With another interest rate cut priced in for July, mortgage rates could trend lower over the summer.

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The Bank of Canada cut its interest rate by 25 basis points, to 4.75%, lowering the borrowing costs for Canadian households and businesses. This is the first interest rate cut in four years and marks a positive change in the Canadian economy. How will this and future interest rate cuts impact the Canadian economy, corporate earnings, and the stock market? Ask the trading experts at Learn-To-Trade.com.

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