The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%, but it warned that rate hikes could resume if the Canadian economy shows advanced signs of fraying.
“The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures,” said the bank in a statement announcing its rate decision. “Economic growth slowed sharply in the second quarter of 2023, with output contracting by 0.2% at an annualized rate. This reflected a marked weakening in consumption growth and a decline in housing activity, as well as the impact of wildfires in many regions of the country. Household credit growth slowed as the impact of higher rates restrained spending among a wider range of borrowers. Final domestic demand grew by 1% in the second quarter, supported by government spending and a boost to business investment. The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4% to 5%.”
The bank added that the “longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability.” If inflationary pressures become too onerous, the bank warned that it “is prepared to increase the policy interest rate further if needed.”
“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% inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians,” the bank added.
Finance Minister Chrystia Freeland praised the announcement in a statement, saying that the “decision to maintain its overnight interest rate is welcome relief for Canadians.”
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