Bank of Canada holds key rate steady at 5%, says economy is weakening
The Bank of Canada held its key interest rate steady at five per cent on Wednesday, deciding against another rate hike as the economy begins to falter.
“With recent evidence that excess demand in the economy is easing, and given the lagging effects of monetary policy, governing council decided to hold the policy interest rate at five per cent,” the central bank said in a news release.
However, the Bank of Canada is keeping the door open to more rate hikes, noting that its governing council is still concerned about inflationary pressures and “is ready to raise interest rates further if needed.”
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Canada’s inflation rate was 3.3 per cent in July, ticking up from 2.8 per cent in the previous month. Inflation is expected to continue oscillating around three per cent for months to come.
The central bank was widely expected to hold its key rate as evidence grows that higher interest rates are weighing on economic activity.
Statistics Canada reported last week real gross domestic product contracted in the second quarter, which convinced forecasters that another rate hike would be unlikely.
“The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures,” the central bank said.
Canada’s labour market has also lost some of its steam: the unemployment rate has been on the rise for three consecutive months.
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Wednesday’s announcement comes after the Bank of Canada raised interest rates at its last two decision meetings, bringing a previous pause on rate hikes to an end.
Altogether, the central bank has raised its key interest rate ten times since March 2022, bringing it from near-zero to the highest level since 2001.
These rate hikes are expected to continue taking effect on the economy, slowing consumer demand and dampening business investment. Economists estimate it takes about one to two years for a rate hike to fully affect demand and business activity.
Bank of Canada governor Tiff Macklem is set to hold a news conference on Thursday, after delivering a speech to the Calgary Chamber of Commerce.
