Canada cut its interest rate for the first time in 4 years on Wednesday 5 June, becoming the first of the Group of Seven (G7) nations to ease borrowing costs. The European Central Bank (ECB) followed with the next rate cut in the same week. However, its US and Australian counterparts likely will hold rates unchanged for several more months.
Canadian banking officials cited improvement in inflation as the reason for the cut but acknowledged that the country couldn’t move too far away from the US on interest rates.
The Bank of Canada (BoC) became the first major central bank to approve a rate cut, marking a turning point in the international fight against inflation following its post-pandemic surge. The Canadian central bank cut its interest rate by 25 basis points, from 5.0% to 4.75%.
Source: Trading Economics
The BoC decision follows rate cuts from central banks in Latin American countries such as Mexico, Brazil and Chile this year, but it is the first member in the G7 to make the move. Traders expect other member countries except Japan to loosen monetary policy in the coming months.
So why is Canada cutting rates before the US and other countries? In short, Canada’s central bank is more confident than its US counterpart that it is winning the war on inflation.
“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,” said BoC Governor Tiff Macklem.
Like the US, Canada has a 2% target for inflation, and price increases there have slowed since peaking in mid-2022, with Canadian CPI falling to 2.7% in April.
That’s not much different than the 2.7% inflation measured by the US Personal Consumption Expenditures (PCE), which the US Federal Reserve (Fed) uses to track price changes. However, Canada’s inflation has steadily declined since the beginning of the year.
While the BoC may have been the first to cut rates, there’s little certainty about when the next cut will come.
At his press conference Wednesday, Macklem said Canada was in a position to cut rates, but couldn’t get too far ahead of the US, which has held its interest rate at a decades-high level of 5.25% to 5.5% for almost a year.
The European Central Bank is also expected to cut its rate for the first time this cycle when it meets on Thursday. Investors in the US don’t anticipate the Fed cutting interest rates until September.
