Bank of Canada Holds Interest Rate Steady Amid Inflation Concerns

The Bank of Canada recently announced that it will maintain its benchmark interest rate at 5%. Economists widely anticipated this decision. However, the Bank warned that future rate hikes might be necessary to address persistent inflation. This move aims to control inflation, even as some experts believe the current tightening cycle may have peaked.

Steady Interest Rates

The decision to keep the overnight rate at 5% influences borrowing costs for many lenders and financial products. The Bank of Canada emphasized its readiness to raise the policy interest rate further if necessary, citing concerns about enduring inflationary pressures.

Persistent Inflation Worries

Price pressures remain broad-based, according to the Bank’s statement. Core inflation indicators show minimal recent signs of decreasing. In July, Canada’s annual inflation rate rose to 3.3%, partly due to higher gasoline prices. The Bank predicts that inflation will stay elevated in the near term but anticipates a subsequent easing.

Economic Factors at Play

The Canadian economy has slowed more than the central bank initially forecasted. Reduced consumer spending on credit and a cooling housing market contribute to this trend. Global economic slowdowns in China and a slight softening in the Canadian job market have also influenced the decision to maintain rates.

Rate Hike Campaign and Its Impact

Since March 2022, the Bank of Canada has rapidly raised rates to curb inflation and discourage spending. This aligns with many central banks worldwide. The effects of rate hikes typically take one to one and a half years to impact the economy fully. The Bank acknowledges that the lagged effects of previous rate increases will continue to affect inflation.

Future Rate Hike Speculation

When considering future rate moves, the Bank looks at metrics like strong wage growth, corporate pricing, and inflation expectations. Annual wage growth continues to outpace inflation, but some indicators suggest a cooling labor market as the unemployment rate inches up.

Economists’ Views

Economists have varying opinions on the Bank’s next steps. Tu Nguyen of RSM Canada believes continued wage growth could increase spending power and rising prices. However, if the jobless rate rises to around six percent and business vacancies decline, the Bank might maintain current rates.

Doug Porter, the chief economist at BMO, suggests that unless there’s an unexpected surge in economic growth, the Bank is likely finished with rate hikes. While inflation might temporarily rise to around four percent, a slowing economy is expected to bring it back down to the Bank’s two percent target over time.

Jamie Squires, Fifth Avenue Real Estate Marketing President, says, “The Bank of Canada’s decision to hold interest rates steady provides a sense of stability for home buyers in the short term, as mortgage rates are unlikely to see immediate increases. However, the broader challenges of housing affordability and the potential for future rate hikes should be considered when deciding to buy a home. It’s essential for home buyers to assess their financial readiness, conduct thorough market research, and plan for potential changes in interest rates to make informed choices in the housing market.”

While some experts speculate about the possibility of rate cuts, most agree it’s too early to discuss such measures. Policymakers are cautious not to disrupt the progress made in taming the heated economy, as seen earlier this year when even a short-lived pause triggered talk of eventual rate cuts and sparked enthusiasm in the housing market. Although consumers may anticipate stable rates, spending levels will unlikely return to those observed earlier this year when the central bank signalled a pause.

The next interest rate decision from the Bank of Canada is scheduled for October 25, and it will be interesting to see how the economic landscape evolves in the coming months. Finance Minister Chrystia Freeland welcomed the Bank of Canada’s decision to maintain its policy rate unchanged, providing a sense of relief for Canadians.

With files from Global BC

Bank of Canada Announcement