Bank of Canada cuts rates, economists predict another reduction next month

The Bank of Canada on Wednesday trimmed its key policy rate by 25 basis points to 4.75%, in a widely expected move that marked its first cut in four years, and said more easing was likely if inflation continued to ease.

Economists immediately predicted the BoC would cut again in July.

After keeping interest rates at a more than two-decade high of 5% for almost a year, the BoC said the indicators for underlying inflation looked increasingly positive.

“With further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive,” Governor Tiff Macklem said in his opening remarks after the announcement.

Financial markets, however, priced in a 35% chance of a cut to 4.50% next month. A majority of economists polled by Reuters had expected Wednesday’s cut.

The Canadian dollar pared its early gains and weakened by 0.4% to 1.3733 to the U.S. dollar, or 72.98 U.S. cents after the decision.

The BoC joins Sweden’s Riksbank and the Swiss National Bank in bringing down rates that have burdened households and businesses alike, and muted economic growth amid easing price pressures.

The European Central Bank is most likely to follow suit on Thursday, financial markets foresee.

Inflation in Canada has slowed this year to hit a three-year low of 2.7% in April. While inflation has stayed below 3% for four months in a row, it is still higher than the Bank’s 2% target.

“If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate,” Macklem said in an indication of what future reductions could look like.

“But we are taking our interest rate decisions one meeting at a time,” he added.

Macklem, who has repeatedly cautioned Canadians that rates will not fall as fast as they rose, said further progress in combating inflation was likely to be uneven and risks remained.