The Bank of Canada reduced its overnight target rate by 25 basis points to 4.75% on Wednesday, marking the first cut to the policy rate since March 2020. Governing Council agreed that monetary policy no longer needed to be as restrictive, the bank said in a press release published on its website.
The decision follows a tightening campaign that saw the Bank of Canada raise rates from near zero to 5.00% between 2022 and 2023.
INFLATION PROGRESS SUPPORTS EASING
The Bank of Canada cited progress towards its 2% inflation target as the justification for the reduction. The Bank's preferred core inflation measures, CPI-trim and CPI-median, which filter out extreme price movements rather than excluding food and energy, had been declining for several months prior to the meeting.
The bank's statement acknowledged that while inflation had not yet returned to the 2% target, the trajectory was sufficiently encouraging to warrant removing a degree of monetary restriction. Governor Tiff Macklem said that if inflation continued to ease it was reasonable to expect further cuts, but stressed that the bank was taking its interest rate decisions one meeting at a time.
POLICY OUTLOOK
In the preceding meetings, the Council had held rates steady.
The Bank of Canada's move came a day before the European Central Bank's June rate decision.
The Governing Council said it was closely watching the evolution of core inflation and remained particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour. Beyond saying that further cuts were reasonable to expect if inflation continued to ease, the bank gave no guidance on the pace or scale of further reductions.