The Bank of Canada is keeping its benchmark interest rate unchanged for now but is warning future hikes may be needed to tame persistent inflation, even as some economists believe the current tightening cycle has peaked.
The Bank of Canada’s target for the overnight rate, which sets the cost of borrowing for many lenders and products like mortgages across the country, remained at 5.0 per cent Wednesday in a move widely expected by economists.
But the central bank said in a statement accompanying the announcement that it would “raise the policy interest rate further if needed” amid concerns about “the persistence of underlying inflationary pressures.”
Price pressures remain “broad-based,” the Bank said, and core inflation metrics have shown “little recent downward momentum in underlying inflation.”
Canada’s annual inflation rate ticked up to 3.3 per cent in July, and the Bank of Canada warned Wednesday that it expects inflation to be “higher in the near term” thanks to rising gasoline prices before easing again.
Canada’s economy has meanwhile shown signs of slowing more sharply than the central bank had initially forecast. Consumers are spending less on credit and Canada’s housing market continues to cool, the central bank noted in its statement.
The Bank of Canada also said that global slowdowns in China, alongside signs of easing in the Canadian jobs market, were among the factors supporting a hold.
The rapid rate hike campaign since March 2022 has tried to cool the economy and discourage spending in an effort to rein in rampant inflation — a cause shared by many central banks around the world.
The effects of interest rate hikes typically take between a year and 18 months to be fully felt on the economy, and the Bank noted that “lagged effects” of previous rate increases will continue to impact inflation.
The Bank of Canada said in its updated forecasts in July that it now expects inflation to hit the two per cent target by mid-2025.
Wednesday’s pause marks the third time it has left the key rate unchanged this year and follows two back-to-back hikes of a quarter-percentage point in June and July.
The central bank also said Wednesday that government spending in the second quarter was contributing to a rise in domestic demand.
The Bank highlighted strong wage growth, corporate pricing and inflation expectations as metrics it is watching in determining where to take rates next.
Doug Porter, the chief economist at BMO, said in a note to clients on Wednesday that while the door is open for future hikes, barring an unexpected surge in economic growth this quarter, the Bank of Canada is “likely done with rate hikes.”
While Porter said inflation is likely to tick back up to around four per cent in the coming months, he added that the slowing economy will bring inflation back down to the two per cent target over time.
CIBC chief economist Avery Shenfeld said in a note to clients Wednesday that he expects that jobs data in the months to come will show enough “slack” in the labour market to keep rates at a peak of 5.0 per cent.
“That said, we’re still a long way from a full all-clear statement from the BoC, let alone any mention of rate cuts,” he wrote.
Porter, too, suggested that talk of rate cuts was premature. Even talking about a formal rate pause could whip up markets and consumers in a way that threatens the Bank of Canada’s progress to date in taming the hot economy, he warned.
“Policymakers clearly do not want a repeat of earlier this year, when a short-lived pause sparked thoughts of eventual rate cuts, in turn firing up housing,” Porter wrote.
Rate hold a ‘welcome relief’: Freeland
Finance Minster Chrystia Freeland said in a statement Wednesday morning that the Bank of Canada’s decision to leave its policy rate unchanged was “welcome relief” for Canadians.
While she reiterated the central bank’s independence in setting monetary policy, she acknowledged that higher interest rates are “weighing heavily on Canadians” and said the Liberal government would use its tools “to ensure that interest rates can come down as soon as possible.”
The Bank of Canada has become a hot political topic beyond the federal level as well, with B.C. premier David Eby, Ontario premier Doug Ford and Newfoundland and Labrador premier Andrew Furey writing letters to the central bank in the past week urging an end to rate hikes.
Ford posted on X, formerly Twitter, on Wednesday morning to respond to the Bank of Canada’s hold decision, writing just, “Good.”
NDP Leader Jagmeet Singh also said in a speech to his caucus on Wednesday morning that “enough is enough” when it comes to interest rates.
Despite Wednesday’s hold, he said that Canada’s still-high interest rates do nothing to tame inflation, which he pinned on corporate profit-chasing.
Singh also put the responsibility on Justin Trudeau’s Liberal government, which sets the Bank of Canada’s inflation-targeting mandate, for slowing the economy and making mortgages more expensive for Canadians.
“Make no mistake, high interest rates hurt Canadians,” Singh said.
“Fewer jobs, fewer homes they can afford and less money to buy the things their kids need.”
What a rate hold means for mortgage costs
The Bank of Canada’s hold means Canadian homeowners won’t be facing steeper mortgage rates, though the rapid rise in the cost of borrowing since last year means higher monthly payments are still in the cards for those set to renew.
It’s also more difficult for prospective buyers to qualify for mortgages with a lender, particularly at federally regulated financial institutions where they must pass the mortgage stress test.
Ron Butler, mortgage broker with Butler Mortgage, said Wednesday morning that there is “zero chance” of interest rates returning to the lows of 0.25 per cent seen in 2020 and 2021.
“That’s not happening,” Butler said in an interview with Anthony Furey on AM640 Toronto, part of the Corus Entertainment radio network. Corus is the parent company of Motorcycle accident toronto today.
Short of an “unbelievable economic catastrophe” the likes of the COVID-19 pandemic, Butler said the Bank of Canada won’t turn back to “ultra-low” interest rates for risk of spurring another run-up in the housing market.
“The truth is the Bank of Canada has learned a lesson that … these incredibly low rates where interest is almost zero … They can’t do that anymore,” he said.
“It’s too dangerous for house prices. It’s too impactful on the economy.”