The Bank of Canada recorded stable interest rates after the economy contracted in the second quarter

Bank of Canada Governor Tiff Macklem attends a news conference after announcing an interest rate decision April 12, 2023 in Ottawa, Ontario, Canada. REUTERS/Blair Gable/File Photo Acquire License Rights

OTTAWA, Sept 6 (Reuters) – The Bank of Canada is expected to keep interest rates at a 22-year high of 5% on Wednesday after the economy contracted unexpectedly in the second quarter, analysts said.

The central bank raised interest rates by a quarter point in both June and July and then agreed to raise rates again to curb inflation, which has been above the bank’s 2% target for 27 months.

While the economy turned negative in the second quarter, inflation remained persistent, unexpectedly rising to 3.3% in July as core metrics stayed well above 3%.

“The Bank of Canada has an opportunity to stay on hold with a hawkish bias based on the GDP data,” Derek Holt, vice president of economics at Scotiabank, said in a note.

The decision will be announced at 10am ET (1400 GMT). Gov. Tiff Macklem will address and hold a press conference on Thursday.

Support for Canada’s Liberal Prime Minister Justin Trudeau has fallen amid high inflation as his Conservative rival Pierre Poilievre criticized him for using government spending to stoke inflation and raising interest rates during a housing crisis.

The 0.2% annualized decline in gross domestic product in the second quarter was well below the Bank of Canada’s (BoC) forecast for GDP growth of 1.5% annualized, a sign that the economy is already in recession might have advised.

“The road ahead looks bleak,” Tiago Figueiredo, an economist at Desjardins Group, said in a note.

Following the release of the growth numbers, money markets significantly reduced bets on a rate hike, now pricing in a less than 7% probability, compared to 23% previously.

Thirty-one out of 34 economists polled by Reuters between Aug. 24-30 expect no change in the central bank’s overnight interest rate at the meeting.

Inflation hit a four-decade high at 8.1% last year, and the BoC has hiked inflation 10 times since March 2022 to try to bring it back to target.

But core inflation measures are slowly declining and there is plenty of data yet to be released ahead of the Bank’s next interest rate meeting in October.

“I’m not sure rate hikes will happen,” Holt said. “Current data offers an opportunity to buy some time.”

reporting by Steve Scherer; Edited by Mark Porter

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Covering political, economic and general news from Canada, as well as breaking news from across North America, was formerly based in London and Moscow and was named Treasury Scoop of the Year by Reuters.