Bank does not rule out further hikes despite mounting signs that economy is slowing
The Bank of Canada opted to hold its benchmark interest rate steady at five per cent as the economy is showing more and more signs of cooling.
The move was widely expected by economists and other financial observers, as the central bank's unprecedentedly swift campaign of rate hikes since early 2022 have made major headway on bringing down runaway inflation.
The impact of rate moves can often take up to 18 months to be fully felt, so after taking its lending rate from functionally zero to five per cent in barely a year-and-a-half, there is a danger of overshooting and slowing the economy by too much.
A slew of financial indicators in recent weeks suggest that may be on the table.
Jobs data for July released at the start of August showed Canada's job market lost about 6,000 workers during the month, and the unemployment rate ticked up slightly to 5.5 per cent.
Later in the month, Statistics Canada released GDP data that showed Canada's economy contracted in the second quarter of 2023. That's the first shrinkage since the onset of the pandemic and a sign the economy may be tipping into at least a mild recession.
While the economic slowdown is welcome news for a central bank trying to get inflation back to its two per cent target, the Bank of Canada says it is ready to further hike rates if it has to. In a statement accompanying its decision, it said it "remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed."
Royce Mendes, an economist with Desjardins, says it is noteworthy that policymakers at the central bank "aren't completely shutting the door to further rate increases."
"It's no surprise that policymakers are hesitant to declare an end to the era of rate hikes, [because] a premature signal that rates have reached their peak would cause an unwanted easing in financial conditions," Mendes said.
Most economic indicators are tracking weaker than the bank was forecasting in its most recent outlook, Mendes added, so ultimately he thinks the bank is quite likely to be done with hikes — whether they're willing to admit that or not.
"The recent string of weak data reinforces our call that the Bank of Canada will not be raising rates any further this cycle," Mendes said.
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Source: cbc.ca
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