Bank of Canada Holds Overnight Interest Rate at 5%, Future Hike's Not Ruled Out

SEPTEMBER 6th 2023- The Bank of Canada has taken a breather in its interest rate hiking campaign, deciding to keep its policy rate at 5.0 per cent. Despite this, the central bank is vigilant and ready to raise rates further if necessary, primarily due to lingering concerns about persistent inflationary pressures.

In July, Canada's annual inflation rate rebounded to 3.3 per cent from 2.8 per cent the previous month. The Bank of Canada cautioned that near-term inflation might continue to rise, driven by escalating gasoline prices before eventually stabilizing. Price pressures remain widespread, with core inflation indicators showing little recent downward movement.

However, the decision to hold rates was widely anticipated, particularly as Canada's economy has displayed signs of deceleration beyond the central bank's initial forecasts. Notably, consumers are reducing credit spending, and the housing market is slowing down.

Global economic slowdowns, particularly in China, and indications of a softening Canadian job market, were cited as contributing factors for maintaining the rates.

The Bank of Canada's policy rate dictates borrowing costs for Canadian lenders and influences consumer interest rates, including mortgages. The central bank embarked on a rapid rate hike campaign since March 2022 to cool the economy and discourage spending, combating soaring inflation—an objective shared by many central banks worldwide. It typically takes between a year and 18 months for the full impact of interest rate hikes to be felt on the economy. The Bank highlighted that the "lagged effects" of previous rate increases would continue to affect inflation.

In its updated forecasts in July, the Bank of Canada anticipated that inflation would reach the two per cent target by mid-2025.

This pause by the Bank of Canada is the third time it has left the key rate unchanged this year, following two consecutive rate hikes in June and July.

As for future rate hikes, the Bank is closely monitoring factors such as strong wage growth, corporate pricing, and inflation expectations. Economists suggest that while the door remains open for future hikes, the Bank is likely finished with rate increases, barring an unexpected surge in economic growth. The slowing economy is expected to gradually bring inflation back down to the two per cent target.

Despite this, talk of rate cuts is seen as premature, and policymakers are cautious about sparking market and consumer concerns that could undermine progress in taming the robust economy. The Finance Minister, Chrystia Freeland, expressed relief over the rate hold, recognizing that higher interest rates have been a burden on Canadians. While she emphasized the central bank's independence in setting monetary policy, she pledged to use government tools to lower interest rates as soon as feasible.

The Bank of Canada's stance on interest rates has become a contentious political issue, with several provincial leaders urging an end to rate hikes due to their economic impact.