In a move aligned with market expectations, the Bank of Canada (BOC) announced a 25-basis-point cut to its policy interest rates, signaling a shift to a less restrictive monetary policy. The decision reflects the central bank's acknowledgment of evidence pointing to a gradual easing of underlying inflation.

The BOC's decision to lower interest rates is supported by recent data, which has increased confidence that inflation will continue to move towards the target of 2%. This shift comes as the BOC has already reduced its holdings of securities acquired during the pandemic by 64%, indicating progress in its efforts to stabilize the economy.

The target for the BOC's overnight rate has been revised to 4.75%, with the Bank Rate set at 5.0% and the deposit rate at 4.75%. While the BOC acknowledges that wage pressures persist, it notes indications of a gradual moderation in these pressures.

However, the statement also highlights challenges posed by a surge in immigration, leading to a decline in per-capita GDP over the past six quarters. The influx of immigrants has created higher demand for rental housing, fueling a spike in rental prices. The BOC recognizes that risks to the inflation outlook remain and emphasizes its careful monitoring of core inflation, demand-supply balance, inflation expectations, wage growth, and corporate pricing behavior.

BOC Governor Tiff Macklem, addressing journalists during a press conference, outlined two conditions for further rate cuts. First, if inflation continues to ease, and second, if confidence in sustaining progress towards the 2% target strengthens. Macklem cautioned that the path to bringing down inflation might be uneven, and risks persist.

Macklem noted several metrics indicating a sustained easing of underlying inflation, including a drop in CPI inflation from 3.4% in December to 2.7% in April, decline in preferred measures of core inflation from 3.5% to approximately 2.75%, and a decrease in the 3-month rates of core inflation from 3.5% to below 2%. Furthermore, the proportion of CPI components experiencing increases faster than 3% has returned to a historical average, suggesting that price increases are no longer unusually widespread.

The BOC's decision to ease monetary policy aligns with its objective to relieve price pressures. The move also emphasizes the central bank's confidence in the progress made thus far in the fight against inflation.

The effectiveness of rate hikes in Canada, compared to the United States, has sparked discussion. One contributing factor is the structure of mortgage rates in Canada. With a dominant presence of variable-rate mortgages and fixed-rate mortgages with shorter terms, existing borrowers face higher mortgage payments due to renewals at elevated rates. This situation can dampen spending and slow demand growth. In contrast, the US, with its typical 30-year fixed-rate mortgages, enables existing borrowers to benefit from lower mortgage rates, stimulating spending.

As the BOC forges ahead with a less restrictive monetary policy, it aims to navigate the challenge presented by the influx of immigrants, which has impacted the Canadian economy. The central bank will continue to monitor indicators closely to ensure a balanced approach to maintaining stable inflation and sustained economic growth.