Canada Becomes First G7 Nation To Cut Interest Rates

• On Wednesday, the Bank of Canada (BoC) trimmed its key policy rate by 25 basis points to 4.75%, the first G7 country to do so, in a widely expected move that marked its first cut in four years. The Bank also said more easing was likely if inflation continued to ease.
• The bank had increased interest rates by 475 basis points in the space of 16 months until July 2023 and since then had kept it steady at 5%. However, 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.
• Inflation in Canada has slowed this year to hit a three-year low of 2.7% in April. However, while inflation has stayed below 3% for four months in a row, it is still higher than the Bank's 2% target. Consequently, Governor Tiff Macklem stressed that the timing of the next cut would depend on whether inflation continued its downward trajectory and the economy evolved in line with the bank's expectations.
• "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.
• Economists have questioned whether the BoC is running the risk of diverging too much from the Fed. To this Macklem said, “There are limits to how far we can diverge from the United States, but we're not close to those limits."
• On the other hand, some economists predicted the BoC would cut again in July even though financial markets had priced in a 39% chance of a cut to 4.50% next month. The next rate announcement is due on July 24, when the bank will also release its latest quarterly forecasts.

 (Source: Reuters)