The Bank of Canada cut its benchmark interest rate by a quarter-percentage-point to sit at 4.75%. The move marks a turning point for the Canadian economy after the biggest inflation and interest-rate shock in decades.

The shift to cutting interest rates will alleviate some of the financial pressure facing Canadians and lead to a pickup in consumer spending, although some households may be wary of quickly opening their wallets.

“With further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive,” Governor Tiff Macklem said, according to the prepared text of his press conference opening statement. “In other words, it is appropriate to lower our policy interest rate.”

A single rate cut “doesn’t mean that households are immediately going to go out and start spending,” said Carrie Freestone, a Royal Bank of Canada economist. However, “once we start to see the Bank of Canada steadily cut rates, that will ease people’s minds, and they’ll feel like they can start going out and spending a little bit more.”

“If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2-per-cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate. But we are taking our interest rate decisions one meeting at a time,” Mr. Macklem said.

The move could help revive the Canadian real estate market, which has stagnated over the past two years as would-be buyers have had trouble qualifying for mortgages and sellers have held off listing due to uncertainty over a sustained easing of inflation and fears of a recession.

“Inflation remains above the 2-per-cent target and shelter inflation is high,” Mr. Macklem said. “But total consumer price index inflation has declined consistently over the course of this year, and indicators of underlying inflation increasingly point to a sustained easing.”

The fight against inflation has gone more smoothly than many economists expected. The Canadian economy has avoided recession and mortgage delinquencies remain low. Economic growth, led by consumer spending, picked up in the first quarter after stalling last year.

All told, this looks like a “soft landing” for the Canadian economy. However, things could still get worse before they get better.

Sources:
The Globe & Mail
The Globe & Mail