The Bank of Canada kept interest rates steady at 5 percent on Wednesday, a widely expected move given signs of a slowdown in Canada’s economy.
“Given the recent signs that excess demand in the economy is easing and given the lagged impact of monetary policy, the Governing Council has decided to keep interest rates on hold at 5 percent,” the central bank said in a statement on its decision.
Still, the central bank is not ruling out the possibility of further rate hikes, noting that “inflationary pressures remain broad-based” and that “underlying inflation has shown little downward momentum recently”. She expects consumer price index (CPI) inflation to be higher in the short-term before easing again.
“The Governing Council remains concerned about the persistence of underlying inflationary pressures and stands ready to raise interest rates further if necessary,” the Bank of Canada said in its statement, adding that it “will continue to assess core inflation dynamics.” .” the outlook for CPI inflation.”
“In particular, we will assess whether the development of excess demand, inflation expectations, wage growth and corporate pricing behavior is consistent with achieving the 2 percent inflation target,” the bank said.
The latest GDP data from Statistics Canada showed the economy contracted at an annual rate of 0.2 percent in the second quarter, weaker than economists had expected. Canada also unexpectedly shed 6,400 net jobs in July and the unemployment rate rose for the third straight month.
The Bank of Canada paused for the first time in its aggressive tightening cycle in March, keeping rates on hold at 4.5 percent while assessing the impact of eight straight rate hikes. In June and July, however, the central bank held back, raising interest rates by 25 basis points each, amid fears it would take longer for inflation to return to its 2% target.
“It comes as no surprise that policymakers are reluctant to declare the end of the era of rate hikes,” Royce Mendes, Desjardins’ chief executive and head of macro strategy, wrote in a note on Wednesday.
“A premature signal that interest rates have peaked would result in an undesirable relaxation in financial conditions. However, recent weak data reinforces our view that the Bank of Canada will not hike rates further this cycle.”
There’s more to come.
Alicja Siekierska is Senior Reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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