Ottawa – The Bank of Canada is widely anticipated to begin cutting interest rates as soon as Wednesday,following a surprising drop in the latest inflation report released Tuesday. The Consumer Price Index (CPI) fell to 2.7% in April, down from 2.9% in march, according to Statistics Canada data. This marks the first time inflation has fallen below the Bank of Canada’s 3% target since June 2023.
The unexpected deceleration in inflation-driven largely by declines in gasoline prices and food costs-has significantly increased market expectations for a rate cut at the Bank of Canada’s scheduled policy announcement at 10 a.m. ET Wednesday. Economists at major Canadian banks, including RBC and TD, now predict a 25-basis-point reduction in the overnight rate, which currently stands at 5%.
“The Bank of Canada has been laser-focused on getting inflation back to 2%,” said Benjamin reitzes, rates & macro strategist at BMO Capital Markets, in a note to clients. “This report gives them the cover they need to start easing.”
The Bank of Canada has held its key interest rate steady at 5% as July 2023, after a series of aggressive hikes aimed at curbing inflation that peaked at 8.1% in June 2022. while inflation has cooled considerably, the Bank of Canada has repeatedly emphasized its commitment to maintaining price stability and has cautioned against premature easing of monetary policy.
However, the latest CPI data, coupled with recent signs of slowing economic growth, appears to have shifted the calculus. A rate cut would provide relief to borrowers facing high mortgage payments and could stimulate economic activity. The Bank of Canada’s decision will be closely watched by businesses and consumers across the country.