The Bank of Canada has lowered its key interest rate to 4.75 per cent, marking the bank's first rate cut since March 2020.
Bank governor Tiff Macklem said in opening remarks that the bank's monetary policy no longer needs to be as restrictive.
"We've come a long way in the fight against inflation. And our confidence that inflation will continue to move closer to the two per cent target has increased over recent months," Macklem said.
Economists were largely expecting the move. The inflation rate has moved closer to the bank's two per cent goal in recent months, coming in at 2.7 per cent in April, with the bank's preferred core measures of inflation also easing throughout the spring.
"It's a small cut, but I think a grand gesture," said Royce Mendes, managing director and head of macro strategy at Desjardins. He noted that the Bank of Canada is the first of the G7 central banks to begin cutting rates.
With many homeowners set to renew their mortgages in the next few months, "if the bank had left interest rates high for too long, we could have tipped the economy into an unnecessary recession," he noted.
"They want to get rates down, but they'll do it in a gradual way, and it'll probably be a less pronounced rate-cutting cycle than we've seen in prior decades, because we're not in the midst of a recession. What we're trying to do right now is fend one off."
CIBC economist Andrew Grantham wrote in a note to clients that "with core inflation decelerating and growth remaining tepid there wasn't a good excuse to not begin the process of moving rates lower today."
He expects the Bank of Canada to lower interest rates by another 25 basis points at its next meeting, on July 24, with another two cuts after that before the end of the year.
Tu Nguyen, an economist with RSM Canada, noted that a single rate cut won't revive the economy overnight.
But she said it "signals to consumers and businesses the beginning of a gradual and orderly rate cut cycle that will unfold over the next year and a half. Recovery can begin now and hit full force in 2025."