Yahoo Finance Bank of Canada holds key rate at 5 per cent, repeats warning of possible future hikes
The Bank of Canada left its benchmark interest rate unchanged at 5 per cent on Wednesday amid increasing signs that rate hikes are weighing on the Canadian economy, but it left the door open to further hikes over concerns about stubborn inflation.
Economists had widely expected the central bank to leave its rate steady as the economy slows and inflation eases. Inflation edged down in September, at a rate below what analysts had expected, and the central bank has forecast GDP growth will be up 0.8 per cent annualized in the third quarter, below its previous forecast published in July of 1.5 per cent.
“In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures,” the central bank said in a press release on Wednesday.
"Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance."
The decision to hold the benchmark rate comes as the central bank downgraded its economic growth forecast, but raised near-term inflation expectations in its quarterly Monetary Policy Report (MPR). It expects Canada's economy to expand 1.2 per cent in 2023, slower growth than its July forecast of 1.8 per cent. It expects GDP growth to come in at 0.9 per cent in 2024, down from its earlier forecast of 1.5 per cent, while it bumped up 2025 GDP expectations, from 2.4 per cent to 2.5 per cent.
While the Bank of Canada expects growth to be slower, it also forecasts inflation to be higher than previously expected. It now expects CPI to be 3 per cent in 2024, up from its July forecast of 2.5 per cent.
The central bank reiterated on Wednesday that it “is concerned that progress towards price stability is slow and inflationary risks have increased and is prepared to raise the policy rate further if needed.” The bank expects inflation will stay around 3.5 per cent until the middle of 2024, and will not return to its target rate of 2 per cent until 2025. The central bank noted in its latest MPR, released on Wednesday, that "the progress to price stability is slow, and inflationary risks have increased."
“Governing Council wants to see downward momentum in core inflation, and continues to be focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour,” the central bank said.
Inflation risks on the rise
Bank of Canada Governor Tiff Macklem said at a press conference on Wednesday that the future path for inflation remains uncertain as inflationary risks have increased since July, among them being war in the Middle East.
"Rising global tensions are increasing risks. In a more hostile world, energy prices could move up sharply, supply chains could become disrupted again, and all that could push up inflation again around the world," Macklem said. The central bank said in its MPR that upside risks to inflation also include elevated inflation expectations among households and businesses, and a growing number of extreme weather events affecting harvests and supply chains.
"We cannot let high inflation become entrenched in the economy," Macklem said.
"If inflationary pressures persist, we are prepared to raise our policy rate further to restore price stability. We've made a lot of progress, but we're not there yet."
BMO chief economist Douglas Porter said in a note on Wednesday that the central bank's 5 per cent rate is "plenty high enough to eventually quell underlying inflation, but it will take time and patience."
"Strong wage growth and firm core inflation trends are going to test the Bank's patience. However, all signs suggest that the economy is struggling mightily to grow, despite the artificial sweetener of a surging population," Porter said.
"Still, price and wage growth remain too fast for the BoC to back off its hawkish rhetoric just yet. To act on that hawk talk would take either a big rebound in growth, a renewed acceleration in inflation, or perhaps a considerably weaker Canadian dollar. We assume none of those forces will weigh in, and look for the Bank to remain on hold deep into 2024.
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 at each meeting, amid concerns that it would take longer to return inflation to its two per cent target.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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