Bank of Canada holds rates, but remains concerned about inflation
The Bank of Canada decided to keep its key overnight rate at 5%. This follows two rate hikes in June and July, bringing it to a 22-year high. The rates have been on hold in the three policy-setting meetings since then.
Despite acknowledging an economic slowdown and a general easing of prices, the BoC expressed ongoing concerns about inflation, which slowed to 3.1% in October, down from a peak of over 8% last year, but it has remained above the central bank’s 2% target for 31 months.
The BoC left the door open for another rate hike, stating that it remains concerned about risks to the outlook for inflation and is prepared to raise the policy rate further if needed. The central bank wants to see a further and sustained easing in core inflation.
The statement issued by the BoC was notably brief, consisting of five paragraphs. It dropped language from the previous statement that mentioned slow progress towards price stability and increased inflationary risks.
The BoC noted that labor market pressures had eased, and growth stalled during the middle part of the year, indicating that the economy is no longer in excess demand. Higher interest rates were mentioned as a factor restraining spending.
The central bank highlighted that lower oil prices, about $10 lower per barrel than forecasted in October, have contributed to a slowdown in the economy, reducing inflationary pressures in various goods and services.
Money markets are speculating that there could be a rate cut as early as March, with BoC Governor stating that the central bank is not currently considering easing due to inflation still being above the target.
The BoC’s forecast in October suggested that inflation would hover around 3.5% until mid-2024 before gradually reaching the 2% target in late 2025. There’s a perception that interest rates might be at their peak, considering excess demand has disappeared, and weak growth is expected to persist.
Canada’s economy unexpectedly contracted at an annualized rate of 1.1% in the third quarter, avoiding a recession. However, upcoming mortgage renewals at higher rates are anticipated to impact growth in the next year.
Economists expect that the BoC could start cutting rates in the second quarter of 2024 as inflation and the economy slow.
The BoC’s decision reflects ongoing concerns about inflation, with the possibility of future rate hikes, even as economic conditions and growth face challenges. The central bank’s stance will likely be closely monitored, considering market expectations and the evolving economic landscape.