Yahoo Finance Bank of Canada flags rates could go higher still, as it holds key interest rate steady
The central bank's benchmark rate remains unchanged at 5 per cent
The Bank of Canada held its benchmark rate steady at 5 per cent on Wednesday amid signs that the Canadian economy is slowing, but left the door open to further hikes if inflationary pressures persist.
“With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5 per cent,” the central bank said in a statement alongside its decision.
But the central bank noted that "inflationary pressures remain broad-based" and that "there has been little recent downward momentum in underlying inflation." It expects Consumer Price Index (CPI) inflation to be higher in the near term, thanks to a recent increase in gasoline prices before it eases again.
"Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed," the Bank of Canada said in its statement, adding that it "will continue to assess the dynamics of core inflation and the outlook for CPI inflation."
"In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the 2 per cent inflation target," the bank said.
The central bank's decision to hold was widely expected, as signs of weakening in the Canadian economy emerged in the wake of the Bank of Canada's aggressive tightening campaign. The latest GDP data from Statistics Canada showed the economy contracted at an annualized rate of 0.2 per cent in the second quarter, weaker than economists had expected. Canada also unexpectedly shed a net of 6,400 jobs in July, and the unemployment rate ticked higher for the third consecutive month.
The Bank of Canada first hit pause on its aggressive tightening cycle in March, leaving rates at 4.5 per cent as it assessed the impact of eight consecutive rate hikes. But the central bank came off the sidelines in June and July, hiking rates by 25 basis points respectively, amid concerns that it would take longer to return inflation to its two per cent target.
Economists don't expect further hikes, despite BoC warning
"It's no surprise that policymakers are hesitant to declare an end to the era of rate hikes," Royce Mendes, Desjardins' managing director and head of macro strategy, wrote in a research note on Wednesday.
"A premature signal that rates have reached their peak would cause an unwanted easing in financial conditions. That said, the recent string of weak data reinforce our call that the Bank of Canada will not be raising rates any further this cycle."
BMO chief economist Douglas Porter said that while the bank has left the door open to further rate hikes, it's likely done with them.
"Policymakers clearly do not want a repeat of earlier this year, when a short-lived pause sparked thoughts of eventual rate cuts, in turn firing up housing," Porter wrote in a research note.
"The Bank has certainly left the door ajar to the possibility of more hikes, but unless growth rebounds in Q3 — which we doubt — the BoC is likely done with rate hikes. The softer growth backdrop will bring inflation back to 2 per cent over time in our view and in the BoC's models, even if the short-term CPI outlook is much more problematic."
CIBC economist Avery Shenfeld also expects that the central bank's 5 per cent rate "will in fact be the peak rate for this cycle."
"That said, we’re still a long way from a full all-clear statement from the BoC, let alone any mention of rate cuts," Shenfeld wrote in a research note on Wednesday.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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