The Bank of Canada has reduced its key interest rate by 0.25 percentage points, bringing it down to 4.5%.

On Wednesday, the Bank of Canada reduced its key interest rate for the second time in a row, now setting it at 4.5%. The central bank cautioned that the return to a 2% inflation rate might be uneven and will influence the pace of future rate adjustments.

The quarter-percentage-point decrease reflects easing price pressures and a slowdown in economic conditions.

In his statement, Governor Tiff Macklem highlighted that while inflation is approaching the target, the bank is wary of potential risks that could further weaken the economy and inflation more than anticipated.

Macklem explained that the journey back to 2% inflation is unlikely to be smooth. “Overall economic weakness is reducing inflation, but rising price pressures in housing and certain services are keeping inflation from falling further,” he said.

Despite growing confidence that inflation is moving toward the target, Macklem noted that the balance of opposing economic forces might influence the speed of further rate cuts. “If inflation continues to decrease as forecasted, additional policy rate reductions could be expected, though the timing will depend on how these opposing factors evolve,” he added.

The Bank of Canada’s previous rate cut last month marked a significant shift in its approach to combating high inflation. High borrowing costs have led to reduced spending by consumers and businesses, easing some of the pressure on prices.

Canada’s annual inflation rate dropped to 2.7% in June after a brief increase in May. The bank’s latest monetary policy report includes updated forecasts, projecting that inflation will hit the 2% target next year.

The Canadian economy, still considered weak relative to population growth, is expected to strengthen in the latter half of 2024. Real GDP is projected to grow by 1.2% this year and 2.1% in 2025.

The Bank of Canada’s next interest rate decision is scheduled for September 4.