Bank of Canada holds rates but says further hikes possible
OTTAWA -Theof(BoC) on Wednesday held its key overnight interest rate at 5 percent, noting that the economy had entered a period of weaker growth, but said it could raise borrowing costs again should inflationary pressures persist.
The centralhikedby a quarter point in both June and July in a bid to tame stubbornly high inflation, which has remained above the‘s 2 percent target for 27 months.
‘s gross domestic product unexpectedly shrank an annualized 0.2 percent in the second quarter, a sign the economy could have already entered a recession. But inflation accelerated in July to 3.3 percent and core measures stayed at about 3.5 percent.
“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 percent,” thesaid in a statement.
Thesaid it was prepared to hikeshould inflationary pressures persist, but analysts said that the hawkish stance is not likely to mean more increases, at least not right away.
“Thehas certainly left the door ajar to the possibility of more, but unless growth rebounds in Q3 – which we doubt – the BoC is likely done with rate,” said Doug Porter, chief economist at BMO Capital Markets.
The Canadian dollar was trading 0.1 percent lower at 1.3655 to the greenback, or 73.23 U.S. cents after touching a five-month low of 1.3676.
The Canadian 2-year yield was trading 6.3 basis pointsbelow its U.S. equivalent to a gap of 36.5 basis points in favor of the U.S. note.
Money markets had seen a 14- percent chance for a hike on Wednesday. Thirty-one of 34 economists polled by Reuters between Aug. 24-30 expected no change to the central‘s overnight rate at the meeting.
“We don’t expect to see a quick turnaround in economic activities with growth expected to remain on the slow side in the third quarter,” said Andrew Kelvin, chiefstrategist at TD Securities. “We expect they will also remain on hold in the October and December meetings.”
ofGovernor Tiff Macklem will deliver a speech and hold a press conference to discuss the decision on Thursday.
The BoC said that due to a recent increase in gasoline prices, which are higher than was assumed when it made its last round of economic forecasts in July, inflation would increase in the near term before easing again.
On the other hand, interestat a 22-year high are restraining spending “among a wider range of borrowers,” and the economy “has entered a period of weaker growth, which is needed to relieve price pressures.”
Inflation hit a four-decade high of 8.1 percent last year, and the BoC has hiked 10 times since March 2022 to try to get it back down to target.
Liberal Prime Minister Justin Trudeau’s support has sagged amid high inflation as his Conservative rival, Pierre Poilievre, hammered him for fueling inflation with government spending and driving upduring a housing crisis.
“Theof‘s decision to maintain its overnight interest rate is welcome relief for Canadians,” Finance Minister Chrystia Freeland said in a statement.