Canada Slashes Interest Rates for the First Time in Four Years

In a landmark decision, the Bank of Canada announced a 25 basis points (0.25%) interest rate cut during their June 5th meeting, lowering the rate from 5% to 4.75%. The BoC's governor hinted at the possibility of further cuts, citing the current inflation trends that could justify additional rate reductions in 2024. This marks a significant shift since the Bank of Canada began its rate hike cycle in March 2022, which saw continuous increases culminating at 5% by September 2023.

The latest inflation report for Canada revealed a 2.7% annual increase in price levels, which was below the anticipated 2.9% and closer to the BoC's 2% target. With two more inflation reports expected before the next BoC meeting in July, a continued downward trend, especially in the core inflation figures, could prompt another 25 basis points cut, aligning with market expectations.

Current futures projections indicate the possibility of nearly two more rate cuts in 2024, with some investors predicting the BoC might implement three more cuts, potentially bringing the interest rate down to 4% by year-end.

However, the biggest risks include a resurgence of inflation and potential depreciation of the Canadian dollar. The Canadian housing market could experience heightened demand this summer due to lower rates and suppressed prices over the past two years, presenting challenges for the BoC.

Conversely, the United States does not appear poised for a rate cut in 2024, complicating matters for the BoC. With Canada's 25 basis points cut, the policy rate now stands 75% lower than that of the US, increasing the likelihood of investors favoring the US dollar and leading to a potential depreciation of the Canadian dollar.

Given the current economic landscape, it is not unrealistic to anticipate the Canadian dollar depreciating to 1.4 against the USD.