Bank of Canada Holds Interest Rate Steady Amid Inflation Concerns - Fifth Avenue REM mediaiqdigital tracking pixel
Market Intelligence, Real Estate News | September 7, 2023

In a recent announcement, the Bank of Canada maintained its benchmark interest rate of 5.0 percent. While economists widely anticipated this decision, it comes with a warning that future rate hikes might be necessary to address persistent inflation. This move is seen as crucial to controlling inflation, even as some experts believe that the current tightening cycle may have peaked.

Steady Interest Rates

The Bank of Canada’s decision to keep the overnight rate at 5.0 percent, which influences borrowing costs for numerous lenders and financial products, was made against a backdrop of escalating inflation concerns. The central Bank emphasized that it is prepared to raise the policy interest rate further if necessary due to worries about the enduring inflationary pressures.

Persistent Inflation Worries

According to the Bank’s statement, price pressures continue to be “broad-based,” and core inflation indicators show minimal recent signs of downward movement in underlying inflation. In July, Canada’s annual inflation rate climbed to 3.3 percent, prompting the Bank to predict that inflation will remain elevated in the near term, partly due to rising gasoline prices. However, it anticipates a subsequent easing of inflation.

Economic Factors at Play

The Canadian economy has displayed signs of a more pronounced slowdown than initially forecasted by the central bank. Factors such as reduced consumer spending on credit and a cooling housing market have contributed to this trend. Global economic slowdowns in China and a slight softening in the Canadian job market have also influenced the Bank’s decision to maintain rates.

Rate Hike Campaign and Its Impact

The Bank of Canada has been implementing a rapid rate hike campaign since March 2022 to curb inflation and discourage spending, aligning with the objectives of many central banks worldwide. It’s important to note that the effects of interest rate hikes typically take between one and a year and a half to impact the economy fully, and 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 focuses on metrics like strong wage growth, corporate pricing, and inflation expectations. While annual wage growth continues to outpace inflation, some indicators suggest a cooling labour market as the unemployment rate inches up.

Economists’ Views

Economists have varying opinions on the Bank’s next steps. Some, like Tu Nguyen of RSM Canada, believe that continued wage growth could lead to increased spending power and, consequently, rising prices. However, if the jobless rate rises to around six percent and business vacancies continue to decline, the Bank of Canada might opt to maintain current rates.

Others, including Doug Porter, the chief economist at BMO, suggest 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

Share this post

Related posts

View all news