The first of G7 central banks to start the easing cycle

The Bank of Canada (BoC) lowered its overnight policy rate by 25 basis points to 4.75%. This is the first change to the policy rate since July 2023 when the BoC tightened policy to 5% and marks the first step down the path towards lower interest rates. The monetary policy statement acknowledged the moderation in inflation and emphasized that 1Q GDP growth was slower than forecast in the BoC’s April Monetary Policy Report (MPR). We will get the next MPR from the BoC at its next meeting in July.

While the statement stopped short of foreshadowing further cuts, Governor Macklem provided a more nuanced view in his press conference. In his opening statement, he

suggested that “it is reasonable to expect further cuts” if “inflation continues to ease” and “confidence that inflation is headed to the 2% target continues to increase”.

Where do we go from here?

Much like the ECB’s rate decision tomorrow, the Bank of Canada’s 25bps rate cut was in line withexpectations, following a first quarter GDP growth that was below the Bank’s expectations. This was also expectedgiven Canada’s high degree of interest-rate sensitivity, the slowing economy and potential for broader economic andfinancial issues if higher rates persist.

The path forward is likely to be gradual. The Governor suggested at the press conference following the meeting that “if we lower our policy rate too quickly, we could jeopardize the progress we’ve made”. The Governor was careful not to pre-commit to another interest rate cut in July, reiterating that any future decisions will be taken “one meeting at a time” and depend on incoming data.

The topic of monetary policy divergence was also addressed suggesting that while “there are limits to how far we can diverge from the US, we’re not close” to those limits yet. On the topic of inflation, a Bank of Canada paper released in 2015 estimates we'd have to see a 10% depreciation in CAD to add 0.3% to core CPI over 4 quarters. Moreover, the Governor also cautioned against expecting an ultra-low interest rate environment similar to the decade following the global financial crisis, suggesting that “it would be prudent if households, governments, and businesses plan that interest rates will be higher than

pre-pandemic”.

If you want to discuss the details of how this change may impact you in more detail or want to review your portfolio, we are always available. Please email or call anytime. Have a wonderful day.

Tony De Thomasis, Bsc, CFPPresident[email protected]905 731 9800 ext 226

Jason De Thomasis, BMOS, CFPCertified Financial Planner[email protected]905 731 9800 ext 229

Renata De ThomasisExecutive Assistant[email protected]905 731 9800 ext 232

Chaojun (Seven) Zhu

Associate[email protected]905 731 9800 ext 237

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