The Bank of Canada reduces its key rate by 25 basis points, to 4.75%

After raising its key rate ten times from March 2022 to July 2023, the Bank of Canada is throwing some weight into its monetary policy and reducing its key rate by 25 basis points, which now stands at 4.75%. . This is the first cut in the central bank’s key rate since March 2020.

% has strengthened in recent months. Great progress has been made in restoring price stability. This is good news for Canadians.”,”text”:”The governing council has agreed that monetary policy no longer needs to be so restrictive, Tiff Macklem, governor of the Bank of Canada. We have made a lot of progress in the fight against inflation. And our confidence that inflation will continue towards the 2% target has strengthened in recent months. Great progress has been made in restoring price stability. This is good news for Canadians.”}}”>The board of directors agreed that monetary policy no longer needs to be so restrictive, Tiff Macklem, governor of the Bank of Canada, explained at a press conference. We have made a lot of progress in the fight against inflation. And our confidence that inflation will continue towards the 2% target has strengthened in recent months. Great progress has been made in restoring price stability. This is good news for Canadians.

This decision marks a change in discourse on the part of the Bank of Canada. As recently as April, the central bank affirmed that the pressure on prices was still too strong to engage in a downward movement in interest rates.

Since the April monetary policy report, core inflation has continued to decline and economic growth has resumedspecified Mr. Macklem.

With excess supply, the economy can still grow even as inflation continues to fall.

In Canada, economic expansion resumed in the first quarter of 2024, after stagnating in the second half of 2023. At 1.7%, gross domestic product growth in the first quarter was weaker than expected, writes the central bank in its press release.

Even though the Bank of Canada is optimistic, it believes that caution is required.

%, it is reasonable to expect further cuts in the key rate. But we make our rate decisions one at a time, Mr.Macklem. We do not want to tighten monetary policy more than necessary to bring inflation back to target. But if we lower the policy rate too quickly, we could jeopardize the progress made in our fight against inflation.”,”text”:”If inflation continues to slow and the data continues to reinforce our confidence that it is heading towards the 2% target, it is reasonable to expect further cuts in the key rate. But we make our rate decisions one at a time, Mr. Macklem said. We do not want to tighten monetary policy more than necessary to bring inflation back to target. But if we lower the key rate too quickly, we could jeopardize the progress made in our fight against inflation.”}}”>If inflation continues to slow and the data continues to reinforce our confidence that it is heading toward the 2% target, it is reasonable to expect further policy rate cuts. But we make our rate decisions one at a time, Mr. Macklem said. We do not want to tighten monetary policy more than necessary to bring inflation back to target. But if we lower the key rate too quickly, we could compromise the progress made in our fight against inflation.

Future progress will likely be uneven and there are still risks, the Governor of the Bank of Canada also warned. Inflation could be elevated if global tensions rise, housing prices rise faster than expected in Canada, or wage growth remains high relative to productivity.

After reaching a peak of 8.1% on an annual basis in June 2022, inflation has slipped below 3% since January 2024. According to the most recent data from Statistics Canada, the consumer price index Consumption increased by 2.7% on an annual basis in April, which represented a decline compared to March (+2.9%).

A drop appreciated in Ottawa

Two Trudeau government ministers interviewed this morning in the House of Commons welcomed the Bank of Canada’s announcement.

This is big news. It’s that breath of fresh air that families dream of as we begin summer. We are on the other side of the mountain.

We would like that even moreadded his colleague Minister of Transport, Pablo Rodriguez.

In Quebec, Finance Minister Eric Girard indicated that credit conditions will continue to be restrictive, but the central bank’s announcement will help the economy. It will take further rate cuts. There are many people with varying rates. This is good news, because these rates will stop risinghe added.

At Desjardins Group, we expect the Bank of Canada to continue on the same path in its next update.

%”,”text”:”We expect to follow up with another rate cut in July. In total, for this year, we expect four rate cuts […] We think that at the end of 2025, we will be at 2.50%”}}”>We expect to follow up with another rate cut in July. In total, for this year, we expect four rate cuts […] We think that at the end of 2025, we will be at 2.50%explained Jimmy Jean, vice-president and chief economist of Mouvement Desjardins, to Midi Info on ICI Première.

For mortgage holders, these are especially those with variable rates who will be the main winners, but it must be said that they have also been the main losers from the increase in rates over the last two yearsrecalled Mr. Jean. %, that it will provide a little more relief.”,”text”:”Next year, at 2.50%, that will provide a little more relief.”}}”>Next year, at 2.50%, it will provide a little more relief.

He does not believe that the decision of the American Federal Reserve (Fed) in the United States to maintain the current key rate for a few more months will slow down the Bank of Canada.

Jeans. But I look at the reaction of the Canadian dollar today and it is very limited. This was expected and I think that there is still a good amount of latitude in what the Bank of Canada is capable of doing independently of the Fed.”,”text”:”It is certain that we cannot go to extremes in terms of spreads because that would potentially lead to a very strong depreciation of the Canadian dollar, says Mr. Jean. But I look at the reaction of the Canadian dollar today and it is very limited. This was expected and I think that there is still a good amount of latitude in what the Bank of Canada is capable of doing independently of the Fed.”}}”>It is certain that we cannot go to extremes in terms of differences because that would potentially lead to a very strong depreciation of the Canadian dollar, says Mr. Jean. But I look at the reaction of the Canadian dollar today and it is very limited. This was expected and I think that there is still a good amount of latitude in what the Bank of Canada is capable of doing independently of the Fed.

A tighter labor market

The Canadian economy created 90,000 jobs in April – leaving the unemployment rate unchanged at 6.1% – which at the time left some doubts about a reduction in the key rate as early as June. According to Statistics Canada, the increase in employment in the country in April was mainly attributable to part-time work, which increased by 1.4%, and to the private sector.

The fact remains that the labor market has tightened considerably since the unemployment rate bottomed out at 4.8% in July 2022.

The same trend is observed in terms of vacant positions. In Canada, the number of job vacancies fell from 991,680 in the third quarter of 2022 to 737,530 in the third quarter of 2023, according to Statistics Canada. The vacancy rate fell from 5.6% to 4.1% during the same period.

A drop that will not favor residential construction

In a note published earlier this week, Desjardins expected that the Bank of Canada would begin reducing rates as early as June and that other monetary easing measures would promote a widespread rebound in sales and property prices. existing later in the year.

That said, the slowdown in economic growth in Canada expected over the coming quarters, relatively high mortgage interest rates and still very limited affordability will limit the extent of this increase in sales and prices.write senior economists Hélène Bégin, Marc Desormeaux and economist Kari Norman.

Moreover, Desjardins does not expect the downward movement in the key rate to result in a generalized boom in residential construction. It will take time for interest rate cuts to revive pending projects, and Canadian industry faces a host of structural challenges.

With the collaboration of Julie Roy