The Bank of Canada (BoC) lowered its key interest rate by 25 basis points to 4.75% on Wednesday, marking its first cut in over four years and making it the first among the G7 nations to reduce rates in this cycle. This decision was driven by continued evidence of easing underlying inflation, which bolstered confidence that inflation would move toward the 2% target. Bank of Canada Governor Tiff Macklem, speaking on the rate cut, stated, “Our judgment today is that the Canadian economy doesn't need monetary policy as restrictive as it has been and so we cut the policy rate by 25 basis points. There are limits to how far we can diverge from the United States, but we're not close to those limits.”
A key reason the Bank of Canada initiated this easing cycle is to address the housing crisis and mitigate some of the associated issues. During Bloomberg Markets: The Close, Stuart Paul from Bloomberg economics stated, “One of the things that the Bank of Canada is trying to get out in front of is resetting mortgage rates as mortgage rates reset in Canada, with about 75% of mortgages resetting by 2026. To get out in front of that and to prevent a consumption crunch and a real reining in of spending, the Bank of Canada looks to start reducing mortgage rates, reducing policy rates, and that's going to have the secondary effect of reinvigorating home prices while they're in the midst of a housing crisis.”As a result, borrowers with variable-rate mortgages will see immediate savings, while fixed-rate mortgage holders will benefit upon renewal. Markets in Canada are now anticipating further rate cuts, potentially bringing the key overnight rate down to 3% by 2025.
Similarly, on Thursday, the European Central Bank (ECB) cut its key interest rate by a quarter-point to 3.75%. This rate cut marks the first interest rate cuts since 2019. The ECB was confident in this cut largely because its seen a significant easing of inflation from 10% in 2022 to around 2.5%. This rate cut decision by the ECB aligns with global efforts to manage inflation while also stimulating a robust economy. Both central banks are navigating complex inflation dynamics and economic conditions, aiming to strike a balance between promoting growth and maintaining price stability. The United States finds itself in a similar situation, with significant decisions looming in the coming months on whether to cut or maintain the current, more restrictive policy stance.
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