Bank of Canada rate cut is 'breath of fresh air' for Trudeau government

By David Ljunggren

OTTAWA (Reuters) - The first Bank of Canada interest rate cut in four years on Wednesday prompted joy among ministers in the federal Liberal government, which faces daily accusations from the opposition that it is responsible for high living costs.

Polls show Prime Minister Justin Trudeau's Liberals would be crushed by the official opposition Conservative Party in an election that must be held by late October next year. The Conservatives say Trudeau is to blame for inflation as well as soaring housing costs and high government spending.

The Bank of Canada trimmed its key policy rate on Wednesday to 4.75% from a 23-year high of 5% while making clear the pace of further cuts would be gradual.

"All families today are happy ... this is big news. It's really that breath of fresh air that families dreamed of," Innovation Minister Francois-Philippe Champagne told reporters.

"We're starting the summer saying to ourselves, 'I think that we are on the other side of the mountain.'"

As inflation soared during the COVID-19 pandemic, the Canadian central bank - which is independent of the government - rapidly hiked rates in a bid to keep prices under control while Ottawa poured billions into support programs.

Inflation is now running at 2.7%, above the central bank's 2% target, but down from a high of 8.1% in June 2022.

Finance Minister Chrystia Freeland, who has presided over a ballooning budget deficit, described the rate cut as welcome news.

"We have been working really hard to create the economic conditions which would make it possible for the bank to lower rates, and today we see the fruit of that hard work," she said.

In an April budget, Freeland announced increased spending but also higher taxes. Bank of Canada Governor Tiff Macklem said at the time the budget would have little impact on the central bank's forecasts.

Nik Nanos, founder of the Nanos Research polling company, said the rate cut could help Trudeau.

"The reality is that stable to lower rates help incumbent governments manage worries about the cost of living," he said in an email.

In a statement, the Conservatives said the "government cannot declare victory as a result of this tiny rate cut because millions of Canadians continue to suffer as a result of their policies."

(Reporting by David Ljunggren; Editing by Paul Simao)