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Bank of Canada Initiates G-7 Monetary Easing Cycle

Bank of Canada Initiates G-7 Monetary Easing Cycle

Jun 5, 2024

Bank of Canada Initiates G-7 Monetary Easing Cycle

The Bank of Canada has reduced its main interest rate by 0.25 percentage points. This cut brings the target for the overnight rate down from 5% to 4.75%, where it had been held for almost a year.

"If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate," said Bank of Canada Governor Tiff Macklem, emphasizing the possibility of additional reductions.

Prior to this rate cut, the Bank of Canada had engaged in a series of rate hikes amounting to 4.75 percentage points over 16 months, aimed at curbing inflation from a peak of 8.1% in June 2022. The aggressive increases have taken a toll on Canada’s economy, particularly due to the nation’s high levels of household and corporate debt and its housing market-driven growth.

The economic impact of the high interest rates has been felt across Canada, with a significant volume of mortgages due for renewal at higher rates. The country's short-term mortgage model means that approximately CAD 700 billion in mortgages will need to be renegotiated within the next two to three years, posing challenges for economic activity and the job market.

Attention turns to the European Central Bank, which is expected to follow suit with a cut in its main interest rate. Meanwhile, the Federal Reserve in the United States is anticipated to maintain its current rates for the foreseeable future, although market speculation suggests a rate cut could occur by September.

The Bank of Canada's rate cut is also seen as a potential boost for risk assets, including Bitcoin. With the potential for a cycle of lower interest rates across Western economies, investors are closely monitoring the impact on asset prices, with Bitcoin trading at $70,500 at the time of the news.

The Bank of Canada's recent rate cut indicates a pivot in monetary policy that could signal a broader trend among developed economies.

The Wall Street Journal Article

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