The Bank of Canada cut interest rates from 5 percent to 4.65 percent, marking the country’s first cut in four years. With this move, Canada became the first G7 country to cut its interest rates, revealing that the next cut will depend on the pace of inflation’s decline in line with the central bank’s expectations. Analysts now expect a second rate cut in July even though financial markets had priced in only a 39 percent chance of a cut to 4.50 percent next month.
BoC diverges from Fed policy rate
Following the central bank’s interest rate cut, economists raised concerns over the Bank of Canada diverging too much from the Federal Reserve. However, governor Tiff Macklem explained that the central bank has limits to how far it can diverge from the Fed and this rate cut is not too close to that limit.
Following Canada’s interest rate cut, the European Central Bank is also expected to cut interest rates for the first time since March 2016 at the end of its June policy meeting later today. However, the economic conditions in the U.S. including stubborn inflation and an unstable labor market have decreased market expectations to only one rate cut by the Federal Reserve this year.
After the central bank’s decision, the Canadian dollar trimmed its earlier gains and fell 0.22 percent to 1.3708 to the U.S. dollar.
Read: Why the European economy is not fully out of the woods yet
Inflation eases
Inflation in Canada declined this year to a three-year low of 2.7 percent in April. Despite inflation remaining below 3 percent for four consecutive months, it is still over the central bank’s 2 percent target.
During the press conference, Macklem reiterated the bank’s stance, stating that if inflation continues to decline, it is reasonable to expect more interest rate cuts.
