Bank of Canada Signals Potential for Gradual Interest Rate Cuts

The Bank of Canada hints at gradual interest rate cuts, with policymakers divided on the timing, as they navigate inflation risks and the path to the 2% target.

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Sakchi Khandelwal
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Bank of Canada Signals Potential for Gradual Interest Rate Cuts

Bank of Canada Signals Potential for Gradual Interest Rate Cuts

The Bank of Canada has suggested the possibility of gradual interest rate cuts in the coming months, according to a recent statement and summary of deliberations from the central bank's governing council. While the Bank of Canada held its key interest rate steady at 5% in its April 10 policy decision, the minutes revealed a split among policymakers on the timing of potential rate cuts.

Governor Tiff Macklem stated that an interest rate cut in June was "within the range of possibilities," even as the central bank maintained interest rates unchanged in April. The governing council agreed that any monetary policy easing would likely proceed gradually, given the risks to the inflation outlook and the slow path to returning inflation to the 2% target.

Some council members felt the Bank of Canada should take its time before lowering rates, concerned about the strong performance of the Canadian economy and ongoing inflation risks. They argued that more reassurance was needed to reduce the risk of progress on core inflation stalling. Other members emphasized that inflation has slowed significantly, including in underlying price pressures, and expressed concerns about keeping interest rates high for too long.

Why this matters: The Bank of Canada's potential shift towards interest rate cuts could have significant implications for the Canadian economy, borrowing costs, and financial markets. The central bank's decisions on monetary policy can influence consumer spending, business investment, and the value of the Canadian dollar.

Despite the differing views, the governing council ultimately agreed to hold the key interest rate at 5% for now. Economists widely anticipate the Bank of Canada officials to begin lowering its policy rate in June or July, with the majority anticipating a 25-basis-point cut at the June 5 meeting. The central bank reiterated that any rate cuts would likely be gradual, considering the risks to the outlook and the slow path for returning inflation to target.

Key Takeaways

  • BoC suggests possibility of gradual interest rate cuts in coming months.
  • BoC policymakers split on timing of potential rate cuts, some favor caution.
  • BoC maintains key rate at 5% in April, but June cut "within range of possibilities".
  • BoC's decisions on rates can impact economy, borrowing costs, and currency value.
  • Economists widely expect BoC to begin lowering rates in June or July 2023.