Bank of Canada interest rate cut marks turning point in inflation struggle

It was widely expected and on Wednesday the Bank of Canada (BoC) and its governor Tiff Macklem cut the key interest rate for the first time in four years.

Cutting the overnight rate to 4.75 per cent down from five per cent where the rate sat at a record high since July 2023.

"I know this is welcomed news to many Canadians," said Macklen during a press briefing in Ottawa Wednesday morning. "I also know that everybody wants to know, where are we headed?"

Nova Scotia Community College (NSCC) business professor Ed McHugh calls the key interest rate cut "a step in the right direction" following a long road of prolonged financial pressure from high interest rates aimed at curbing record inflation.

"It's not going to make a huge dent, it's not a huge deal but a good sign," said McHugh.

The rate adjustment was predicted by many economists and is welcome news for many Canadians, particularly the 2.2 million mortgage holders who are coming up for renewal by 2025 and who were dreading the higher rates.

Halifax-based mortgage broker Earl Smith says it is good news for people carrying debt and those looking to get into the housing market.

"For some people, it's a matter of lines of credit that they have debt on now, with the interest rate coming down 0.25 percent," said Smith. "For other people, it's about qualifying for a mortgage or it's the renewal coming up that with the higher rates they have been stressed about."

With the softening of the interest rate and future rates cuts expected if things continue in the right direction, it could prompt those who are up for renewing their mortgages to adjust their financial strategy.

"Are they going to consider the variable for renewal and hopefully ride a rate cycle downwards?" questioned Smith. "Or are they going to go with a shorter fixed term with the anticipation that rates are going to be lower in the next couple of years?"

McHugh says the aggressive strategy and long-term interest rate hikes from the Bank of Canada have worked to tame inflation which at last glance sits at 2.7 per cent, not far off the 2 per cent target.

The challenge now McHugh suggests is the economy has weakened and slowed to a point where the high interest rates have saddled many Canadian households with more debt which justifies today's cut.

"Credit card debt is up, home equity lines of credit are up and at some point, somewhere the bank (BoC) has to say we need to find a way to keep inflation down but we can't raise people's debt levels to the point where they can't buy anything," said McHugh.

The Bank of Canada will release its next interest rate decision on July 24, when economists anticipate the key interest rate will come down again, but only modestly.

"That's just conservative fiscal policy and it's the right way to manage the economy," said McHugh.