(Kitco News) - Global interest rates have likely peaked as the Bank of Canada is the second major central bank to embark on a new easing cycle.
Gold prices are spiking against the Canadian dollar as the central bank cut interest rates by 25 basis points, bringing its overnight rate to 4.75% with the Bank Rate at 5% and the deposit rate at 4.75%.
The cut was relatively in line with market expectations as inflation in Canada continues to weaken.
“With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data has increased our confidence that inflation will continue to move towards the 2% target,” the BoC said in its monetary policy statement.
In global currency markets, gold is holding solid gains against the Canadian dollar in its initial reaction to the BoC’s rate cut. Spot gold last traded at C$3,207.54 an ounce, up 0.64% on the day.
While markets are mostly focused on the Federal Reserve’s monetary policy, the Bank of Canada’s rate cut signals a new shift in the global economy. It is the second major central bank to cut rates. The Swiss National Bank was the first major central bank to embark on a new easing cycle.
Looking ahead, there are growing expectations that the European Central Bank will cut interest rates on Thursday as its economy continues to struggle.
In this environment, many economists expect that the Federal Reserve will soon start to ease interest rates. Markets have a roughly 70% chance of moving in November.
Along with its rate cut, the Bank of Canada presented a relatively positive outlook for the domestic economy.
“Overall, recent data suggest the economy is still operating in excess supply,” the monetary policy statement said.
Stephen Brown, Deputy Chief North America Economist at Capital Economics, said that he expects this will be the first of many.
“The dovish tone of the accompanying communications suggests that another rate cut in July is already nailed on. For now, our forecast is that there will be three more 25 bp cuts this year, implying that the Bank will pause at one of its meetings, but if anything, the odds seem to favour cuts at every meeting,” Brown said in a note.
The Bank of Canada has said that it expects inflation to continue trending lower toward its 2% target, but it remains focused on keeping inflation on its current path.
“ Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians,” the central bank said.
