Bank of Canada cuts key interest rate by quarter percentage point to 4.5%

The Bank of Canada cut its key interest rate for a second consecutive time on Wednesday, but warned the path back to two per cent inflation may be uneven and would ultimately determine the pace of future rate cuts

The central bank says its decision to lower its policy rate by a quarter percentage point was motivated by easing price pressures and weakening economic conditions.

Its key interest rate now stands at 4.5 per cent.

In his prepared statement, governor Tiff Macklem noted that as inflation edges closer to target, the central bank is also trying to avoid the risk of the economy and inflation weakening by more than expected.

However, he said the path back to two per cent inflation likely won’t be a straight line.

“The overall weakness in the economy is pulling inflation down. At the same time, price pressures in shelter and some other services are holding inflation up,” Macklem said.

Although the governor said the Bank of Canada is “increasingly confident” that inflation is headed back to target, the push and pull between those opposing forces could affect the pace at which price growth eases.

“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate. The timing will depend on how we see these opposing forces playing out,” he said.

“In other words, we will take our monetary policy decisions one at a time.”

The Bank of Canada delivered its first interest rate cut in four years last month, marking a major turning point in its battle against high inflation.

High borrowing costs have caused a pullback in spending by both consumers and businesses, which economists say has helped take the pressure off price growth.

Canada’s annual inflation rate fell back to 2.7 per cent in June after temporarily flaring up in May.

The Bank of Canada’s monetary policy report released Wednesday includes new forecasts, which suggest inflation will return to the two per cent target next year.

The Canadian economy, which the central bank notes remains weak relative to population growth, is expected to strengthen in the second half of 2024.

Real gross domestic product is expected to grow on average by 1.2 per cent this year, followed by 2.1 per cent in 2025.

The central bank’s next interest rate decision is scheduled for Sept. 4.