04:24 PM EDT, 06/05/2024 (MT Newswires) -- Those who believed the Bank of Canada would, as it did, cut the benchmark interest rate on Wednesday by 25 basis points may be humming the Shangri-Las' song 'Leader of the Pack' to themselves as the central bank became the first G7 nation to begin easing rates, sending stocks higher.

The S&P/TSX Composite Index ended the day up 166.84 points to 22, 145.02, with most sectors higher following the central bank's decision to lower its benchmark rate to 4.75% while leaving the door open for further rate cuts if inflation continues to ease in coming weeks and months.

The biggest gainers on the day are Base Metals, up1.8%, and Information Technology, up 1.7%, with Battery Metals dropping 4.7%.

The BoC's cut, which is expected to soon be followed by central banks in Europe and the United Kingdom, does not come without some controversy over diverging from the Federal Reserve's policy path. Going in to today, Scotiabank had said guidance would matter in determining the decision, and it expected the central bank to wait until its July meeting to begin cutting rates. In response to today's news, Derek Holt, Vice-President & Head of Capital Markets Economics at Scotia, said Macklem's forward guidance "remains untrustworthy." Scotia now forecasts a cut in July and adds 25bps to the year for 100 bps of cuts in 2024.

Holt cited Macklem as saying the BoC is "not close" to the limits of undershooting the Fed, and "doesn't seem the least bit concerned about the (Canadian) currency."

According to Holt, monetary and fiscal policy are likely to add upside risk to the 2025 election year. "The BoC is gambling that inflation risk will be durably lower than the U.S.," he added.

Meanwhile, National Bank noted the BoC, in the "first rate decision with material uncertainty in a year",, which it said is "in line with market expectations and the consensus forecast." The focus, it said, now turns to the pacing of cuts in this "nascent easing cycle."

Noting the opening statement to Macklem's press conference, National Bank wrote that Macklem said it's reasonable to expect further easing as long as inflation continues to ease. "That puts a July cut squarely in focus and we'd be inclined to be they will ease again at the next meeting. At the same time, National noted earlier BoC communications indicated monetary policy easing this year would be "gradual." Macklem confirmed this view in the press conference.

"So," National said, "although back-to-back cuts may be instituted to start, we're skeptical they'll continue at the same pace thereafter. We agree with market expectations that 50 basis points of additional rate relief is appropriate in 2024. In contrast, the consensus sees this marking the start of a more aggressive easing campaign. The median expectation is for a 4% policy rate by year-end. Three more cuts over the last four decisions of the year isn't a pace of cuts we would characterize as gradual and isn't as likely to materialize barring a more material slowdown in the economy."

With an implied probability of roughly 65%, National noted market participants now believe that policymakers will follow up today's rate cut with another in July. National said that makes sense given the BoC commentary regarding the possibility.

For his part, Royce Mendes at Desjardins said markets are "coming around" to the idea that the BoC is "in a race against time to avoid tipping the economy into an unnecessary recession."

"Governor Macklem wasn't shy about telling Canadians that they should expect rates to fall further if inflation continues its downward trend," he added.

According to Mendes, easing policy again in July also "makes sense from an operational point of view," Mendes noted. Macklem confirmed that he has no problem cutting rates while the Fed is still on hold. Mendes also noted Macklem remained optimistic about the outlook for the economy, but on that Mendes added: "Remember that view is conditional on his own expected path for interest rates."

Desjardins sees three more 25bps cuts this year and more in 2025 to stave off a contraction.

For RBC, the bottom line is that the rate cut today from the Bank of Canada marks the "first step" of an easing cycle where interest rates are lowered back towards "normal" levels, and "spells good news" for Canadian households that have been contending with elevated borrowing costs. To be sure, it noted, interest rates themselves are still high -- and will still be at levels the BoC views as 'restrictive' by the end of this year even if RBC's expected 100 bps worth of cuts materialize.

Still, RBC said, the move itself signifies confidence among policymakers that the most likely path for future inflation in Canada is down. It noted the BoC will get two additional monthly inflation and labour market reports, as well as the second quarter business and consumer surveys before the next scheduled policy decision in July. "Those should all offer more clues on a few key pressures points that the BoC highlighted including housing, wage growth and inflation itself. Our own base case assumes another 25 basis point cut in July," it added.

Gold prices rose mid-afternoon on Wednesday even as the dollar rose as treasury yields eased as the private sector added fewer than expected jobs last month. Gold for August delivery was last seen up US$26.30 to US$2,373.70 per ounce.

West Texas Intermediate (WTI) crude oil rose on Wednesday, rebounding from a four-month low following five losing sessions despite a surprise rise in US inventories. West Texas Intermediate crude for July delivery closed up US$0.82 to settle at US$74.07 per barrel, while July Brent crude, the global benchmark, closed up US$0.89 to US$78.41.