The Bank of Canada cuts key interest rate to 4.75%, marking the first rate cut since March 2020. Bank Governor Tiff Macklem announced that the monetary policy no longer needs to be as restrictive, given the progress in the fight against inflation.

Why the Bank of Canada Cuts Key Interest Rate

Inflation has moved closer to the Bank of Canada’s 2% target, standing at 2.7% in April. Macklem noted that confidence in achieving this target has increased. Economists anticipated this move as the Bank of Canada cuts key interest rate to 4.75%.

Economic Context and Implications

The decision to cut the key interest rate to 4.75% was influenced by weaker-than-expected GDP numbers. The economy grew by only 1.7% in the first quarter, raising the likelihood of a rate cut. This cut follows a period of aggressive rate hikes, with the last increase to 5% in July 2023. Major banks like RBC, Scotiabank, BMO, TD Bank, and CIBC responded by reducing their prime lending rates to 6.95% from 7.20% as of Wednesday afternoon.

Macklem’s Approach to Future Rate Cuts

Despite the rate cut, Macklem emphasized a cautious approach. Future decisions will be taken “one meeting at a time.” Canadians can expect more cuts if inflation continues to ease and confidence remains high that it will meet the 2% target. Macklem warned against lowering the policy interest rate too quickly, as it could jeopardize progress made in controlling inflation.

Expert Opinions on the Rate Cut

Royce Mendes, managing director at Desjardins, described the move as significant. The Bank of Canada cuts key interest rate to 4.75% and becomes the first among G7 central banks to do so. He pointed out the potential for economic instability if rates remained high for too long.

CIBC economist Andrew Grantham anticipates another 25 basis points cut in the next meeting on July 24, with two more cuts likely by year-end. Tu Nguyen of RSM Canada noted that this rate cut signals the start of a gradual rate cut cycle, with a full economic recovery expected by 2025.

Impact on Homeowners and Mortgage Holders

For variable-rate mortgage holders, such as Toronto resident Joseph Hopkinson, the interest cut is a welcome relief. Hopkinson’s mortgage payment skyrocketed from $3,600 to $5,793 a month after purchasing a semi-detached house in June 2022. The recent cut would save his family approximately $142 per month, easing their budget constraints.

The Bank of Canada cutting its key interest rate is a strategic move to balance inflation control with economic stability. As the rate cut cycle begins, Canadians can look forward to potential relief in their mortgage payments and overall financial pressure. At Mortgage Squad, we are here to help you navigate these changes and make the most of the evolving financial landscape.

For more information on how the Bank of Canada interest rate affects your mortgage options, or to learn about refinancing your mortgage, contact us at Mortgage Squad today. Our experts are ready to assist you with tailored advice and solutions to meet your financial needs.