Bank of Canada's Tiff Macklem signals more rate cuts possible after historic shift (2024)

'We’ve come a long way in the fight against inflation' — Tiff Macklem

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Barbara Shecter

Published Jun 05, 2024Last updated 22hours ago6 minute read

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Bank of Canada's Tiff Macklem signals more rate cuts possible after historic shift (1)

The Bank of Canada cut interest rates Wednesday for the first time since launching a historic hiking cycle to combat inflation in March 2022, marking a significant shift in monetary policy that could open the door to additional cuts in the coming months.

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The central bank set its overnight rate at 4.75 per cent, down 25 basis points from the five-per-cent level that had been in place since rates peaked in July 2023.

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Bank of Canada's Tiff Macklem signals more rate cuts possible after historic shift (4)

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“With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive,” the Bank of Canada said in a statement Wednesday, adding that recent data has increased confidence that inflation will continue to move toward the central bank’s target of two per cent.

Inflation fight

“We’ve come a long way in the fight against inflation,” Bank of Canada governor Tiff Macklem said during a news conference following the rate announcement. “The considerable progress we’ve made to restore price stability is welcome news for Canadians.”

Over the past couple of years, Canadian consumers have struggled to keep up with inflation and then higher interest rates, with some falling behind on credit cards and car payments and as they faced higher monthly bills from food to rent and mortgage payments.

Markets had been betting on a cut this month after six consecutive holds leading up to Wednesday’s announcement and are now pricing in a further cut in September.

Interest rate cuts to come

Arlene Kish, director of Canadian economics at S&P Global Market Intelligence, said in a note Wednesday that there could be two more 25-basis-point cuts this year and five more by the end of 2025, bringing the key overnight rate down to three per cent.

Bank of Canada's Tiff Macklem signals more rate cuts possible after historic shift (5)

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Macklem, who has previously indicated that rates are unlikely to come down as quickly as they were ratcheted up, said it would be reasonable to expect further rate cuts if inflation continues to easeand central bankers become increasingly confident that it is headed sustainably to the two per cent target level.

“But we are taking our interest rate decisions one meeting at a time,” he said. “We don’t want monetary policy to be more restrictive than it needs to be to get inflation back to target. But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made.”

Further progress in bringing down inflation is likely to be uneven, he said, and risks to the outlook remain.

“Inflation could be higher if global tensions escalate, if house pricesin Canada rise faster than expected, or if wage growth remains high relative to productivity,” Macklem said.

Shelter price inflation remains high, contributing to overall inflation above the central bank’s target, he said, but he added that total consumer price inflation has declined consistently over the course of this year, with indications that underlying inflation is at a point of “sustained easing.”

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For example, CPI inflation eased to 2.7 per cent in April from 3.4 per cent in December, while the Bank of Canada’s preferred measures of core inflation had come down to about 2.75 per cent in April from about 3.5 per cent last December. Meanwhile, the three-month rates of core inflation slowed to under two per cent in March and April from about 3.5 per cent in December.

In a further indication that price increases are no longer “unusually broad-based,” Macklem pointed to the proportion of CPI components increasing faster than three per cent, which is now close to the historical average.

And while economic growthfell behind Bank of Canada projections in the first quarter, at 1.7 per cent on an annualized basis, he noted that it recovered from a stall in the second half of last year and consumption growth proved solid at three per cent.

Business investment and housing activity also increased and businesses are continuing to hire workers.

“Employment has been growing, but at a slower pace than the working-age population,” Macklem said. “This has allowed the supply of workers to catch up with job vacancies. Elevated wage pressures look to be moderating gradually.”

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Central bankers will continue to closely watch the evolution of core inflation, he said, and remain particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.

Bank of Canada on slow path

James Orlando, a senior economist at Toronto-Dominion Bank, said the Bank of Canada has finally been convinced by what other markets watchers were seeing in terms of softening inflationary pressures.

“Like that one neighbour who has let their yard become overgrown, the BoC has heard the complaints and decided to bring out its policy trimmers to cut rates,” he said in a note Wednesday. “While the BoC has waited longer than we would have hoped, today starts the process of lower interest rates for Canadians going forward.”

However, he said the Bank of Canada is likely to adopt a cut and pause path to bringing rates down, with the next cut in September. Central bankers will want to avoid a rebound in inflation, as the United States has experienced, and to keep the housing marketfrom getting overheated by a rush of prospective buyers who were waiting for lower rates, he said.

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“We believe that the path forward for the BoC is going to be slow,” Orlando wrote.

Victor Tran, a mortgage broker and realtor with comparison site Rates.ca, said the rate decrease is likely to spur some activity in the housing market over the summer, but won’t alleviate the pressure keeping many out of the market.

“Rate decreases may loosen up what has been a sluggish housing market for much of the year, but the buyers that were limited by high rates before the cut are likely to still be limited by high rates after the 25-basis-point drop,” he said.

The Bank of Canada’s interest rate cut Wednesday put the central bank on a different trajectory than the U.S. Federal Reserve, which is not expected to begin cutting rates before September. The U.S. economy has been running hotter than Canada’s and inflation has not come down steadily.

Some commentators fear the divergence will punish the loonie and that the effects of a lower Canadian dollar could seep into other parts of the economy.

“The Bank of Canada will have to walk a careful line here between normalizing interest rates in support of the Canadian economy, but not going too far such that the unintended consequence is a much weaker loonie,” said Philip Petursson, chief investment strategist at IG Wealth Management.

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In a note, he said that if the Bank of Canada cuts rates by 50 basis points more than the Fed in 2024, there is a risk of the loonie falling to between 70 and 72 cents US.

Recommended from Editorial

  1. Read the Bank of Canada official statement on the rate cut
  2. Canadian banks say borrowers showing strain of higher rates

At the news conference, Macklem said the two North American central banks have diverged on monetary policy direction and pace in the past and while he acknowledged that there is a limit to how far apart they can be before negative impacts are felt, he said he is not concerned about a significant impact on either economy at this point.

“Conditions are different…. I don’t think we’re close to that limit (of divergence),” he said. “There’s no … bright line and you can see from history there have been periods of considerable divergence.”

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Bank of Canada's Tiff Macklem signals more rate cuts possible after historic shift (2024)

FAQs

Bank of Canada's Tiff Macklem signals more rate cuts possible after historic shift? ›

Tiff Macklem said more rate cuts could be in the offing should inflation show further signs of slowing. The Bank of Canada lowered its target for the overnight rate to 4.75% from 5%, where it sat for 11 months.

Did Bank of Canada cut interest rate to 4.75% signaling end to historic hiking cycle? ›

The Bank of Canada cut its policy interest rate to 4.75 per cent from 5 per cent, kicking off a long-awaited monetary policy easing cycle. This is the first rate cut in four years and comes as inflation nears the central bank's target.

Did the Bank of Canada cut interest rates? ›

The Bank of Canada today reduced its target for the overnight rate to 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is continuing its policy of balance sheet normalization. The global economy is expected to continue expanding at an annual rate of about 3% through 2026.

How many rate cuts in 2024 in Canada? ›

After July, the BoC will cut its policy rate twice more this year, to 4.00% by the end of 2024, according to a slight majority of economists in the poll - 16 of 30. While 10 of them expected the rate to be at 4.25% or higher, only four predicted it would reach 3.75%.

How many times can Bank of Canada change interest rate? ›

The Bank carries out monetary policy by influencing short-term interest rates. It does this by adjusting the target for the overnight rate on eight fixed dates each year.

Is Canada the first G7 to cut rates? ›

The Bank of Canada's rate cut could be very positive for Middlefield Canadian Income (MCT)... Last week Canada became the first G7 country to cut interest rates, moving its policy rate from 5.0% to 4.75%, having held the rate since July 2023.

What is the highest historical interest rate in Canada? ›

What Is the Highest Mortgage Interest Rate in History? The highest mortgage rate in Canadian history was 21.75% in August 1981 for a 5-year fixed mortgage. This rate stayed at this all-time high until October 1981 before decreasing rapidly over the following months.

Why do banks cut interest rates? ›

Lower borrowing rates for both consumers and businesses. This will incentivize consumers to spend and businesses to invest in projects thus injecting capital into the economy. This infusion of capital will typically spur growth in the economy and the markets.

Who controls the Bank of Canada interest rate? ›

However, the day-to-day conduct of monetary policy is the responsibility of the Bank's Governing Council. The inflation-control target guides the Bank's decisions on the appropriate setting for the policy interest rate, which is aimed at maintaining a stable price environment over the medium term.

What does it mean when Bank of Canada lowers interest rate? ›

Bottom line: If your lender's prime rate decreases in response to the BoC's interest rate cut, as a variable rate mortgage holder you will benefit in one of two ways: Either your regular mortgage payment will decrease, or more of your mortgage payment will be directed toward your mortgage principal, meaning you could ...

What is the rate cut in Canada 2025? ›

We're looking for the central bank's policy rate to be cut below three percent by the end of next year.” So, in other words, Canadians could see the current 4.5% overnight lending rate drop to 2.75% by the end of 2025.

How many more rate cuts in 2024? ›

In its statement, the Fed said there has been some "modest" progress of late in lowering inflation closer to its target, but added that the pace of price increases "remains elevated." Inflation-weary consumers will likely have to bear higher borrowing costs throughout 2024, with the Fed adding that it's penciling in ...

What is the Bank of Canada prediction for 2024? ›

Most experts believe rates will close out 2024 at 4.00%. Based on their latest Market Participant Survey, the Bank of Canada's interest rate forecast also suggests we could see the policy rate reduced to 4.00% by the end of the year.

What is Canada's main source of income? ›

In Canada, the service sector makes up two-thirds of the economy. Real estate, manufacturing, and natural resources are all also major sectors of the economy.

Will mortgage rates go down in 2024 in Canada? ›

The market consensus on the mortgage interest rate forecast in Canada is for the Central Bank to cut rates by 0.25% from 4.50% to 4.25% at their September 2024 meeting.

What is the prediction for interest rates in Canada? ›

I'm holding onto a forecast of Canadian prime rates falling by about 1.5% into the first quarter of next year and continuing to fall another 0.50% (for 2.0% in total) by the end of 2025. At the moment, economists project an eventual higher neutral-rate resting point of 3% (up from a projected 2.5%).

Will there be an interest rate hike in Canada? ›

While the first small 0.25% interest rate hike in Canada happened in March 2022, as of August 2024, we have only started to see the full effects of the rate hikes of 2022. As 2024 comes to an end, we will likely see the effects of 2022 and 2023 rate increases build momentum.

How the Bank of Canada rate hike will affect your mortgage? ›

This is because rate hikes not only increase mortgage payments temporarily but also reduce the share of these payments that pay off the principal. A few years of higher rates will therefore lead to a household having a larger remaining balance to repay, negatively affecting borrowers' consumption in the future.

When was the last interest rates hike? ›

Since May 2022, interest rates have been increased by a total four percentage points. “The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” the RBA said today in a statement on its monetary policy decision.

When was the lowest interest rate in Canada? ›

Lowest rates:
  • One-year term: 2.79%; January 13, 2021 to March 16, 2022.
  • Three-year term: 3.39%; February 25, 2015 to September 13, 2017.
  • Five-year term: 4.64%; April 8, 2015 to June 29, 2016, and September 7, 2016 to July 12, 2017.
May 6, 2024

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