Bank of Canada Holds Key Rate
On Wednesday, the Bank of Canada opted to keep its benchmark interest rate steady at 5.0 percent, despite indications of an economic slowdown and a moderation in inflation.
In its official statement, the central bank did issue a warning, noting that progress towards achieving price stability was sluggish, and the risks of inflation had escalated. It also emphasized its readiness to implement additional rate hikes if necessary.
This decision to maintain the rate was widely anticipated by economists and market analysts leading up to the announcement.
Since March 2022, the Bank of Canada has swiftly raised its target for the overnight rate, which serves as a benchmark for various loan interest rates, such as mortgages, by a substantial 4.75 percentage points. This move aimed to counteract surging inflation, resulting in increased borrowing costs for both businesses and consumers. This, in turn, curtailed the spending capacity of Canadians, as a larger portion of their finances went towards servicing debt.
The Bank of Canada expressed confidence in the effectiveness of previous rate hikes, citing “growing evidence” that tighter monetary policies were alleviating upward pressure on prices in their statement.
Indeed, overall inflation has substantially cooled down from the historic 40-plus-year highs witnessed in the previous year, registering at 3.8 percent in September. Nevertheless, this figure remains above the central bank’s critical target of two percent, prompting concerns among officials that the decline in inflation might stall before reaching the desired level.
In the updated Monetary Policy Report released on Wednesday, the Bank of Canada maintained its forecast that inflation would gradually moderate to two percent by 2025. However, it cautioned that persistent core inflation and the influence of energy prices could keep inflation at a higher level in the short term, with an expectation that it would hover around 3.5 percent until mid-2024.
To determine the necessity for further rate increases, policymakers are closely monitoring various factors, including trends in cooling core inflation, expectations of price increases, the normalization of corporate pricing, and wage gains.
One notable risk highlighted in the Bank of Canada’s inflation forecast is the Israel-Hamas conflict. The monetary policy report acknowledged that this conflict has not yet disrupted global oil supplies, but it cautioned that should the conflict escalate regionally, it could lead to a rise in energy prices.
Bank of Canada Governor Macklem, addressing reporters on Wednesday, emphasized that the Israel-Hamas conflict, along with Russia’s ongoing invasion of Ukraine, presented significant risks in the central bank’s economic outlook.