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.
Are rate hikes done?
The Bank highlighted strong wage growth, corporate pricing and inflation expectations as metrics it is watching in determining where to take rates next.
Tu Nguyen, economist with RSM Canada, told Global News on Wednesday that annual wage growth is still trending above inflation, and that likely makes the Bank of Canada “uncomfortable.”
“If workers are getting more money, it could means increased spending power. The demand for goods and services might mean that prices might go back up again,” Nguyen said.
However, there are signs the labour market has been cooling as the unemployment rate ticks up heading into the fall. Nguyen suspects that if the jobless rate hits around six per cent and vacancies at businesses continue to decline, the Bank of Canada should be satisfied with staying on the sidelines indefinitely.
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.
Even if consumers expect rates to hold where they are today, Nguyen doesn’t expect the same levels of spending the economy saw earlier in the year when the central bank signalled a pause.
A slowing economy could be giving workers less confidence in their jobs, she said, as evidenced by signs that savings rates are rising among households.
The Bank of Canada’s next interest rate decision is set for Oct. 25.
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.”
Derek Holt, vice president and head of Capital Markets Economics at Scotiabank, on Wednesday took issue with Freeland and premiers’ recent commentary on the Bank of Canada’s actions.
He wrote in a note to clients that politicians weighing in on monetary policy is “unhelpful,” and could affect Canada’s international reputation if their comments “create the impression that political interference risks influencing the BoC’s decisions.”
Holt particularly said that Freeland’s comments calling the rate hold “welcome relief” are “not the domain of a Finance Minister.”
Freeland echoed her Bank of Canada commentary to reporters later in the day on Wednesday and responded to reporters who asked why she felt it necessary to weigh in on monetary policy.
The deputy prime minster responded by again reaffirming the Bank of Canada’s independence and the importance of the institution to Canada’s global standing, including its triple-A credit rating.
“Our government understands how important an independent central bank is to Canada,” Freeland said.
“I’m always going to respect that, our government is always going to respect that. We understand that the strength of the Canadian economy depends on the strength and stability of our institutions.”
She went on to say that she has heard concerns from Canadians and business owners about the pain caused by higher interest rates. It is importance for Canadians to know that “their finance minister hears them,” she said. “And I absolutely do.”
Freeland said again that she would work with leaders at other levels of government to “create the economic conditions that will allow prices to stabilize, and therefore will make it possible for interest rates to come down.”
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. He said the Liberals should be reconsidering the central bank’s mandate to ensure it puts people first.
“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.”
In response to a request for more details on the suggested changes, Singh’s director of communications told the Canadian Press the Liberals could ask the central bank to halt rate hikes as part of regular discussions between the governor and federal finance minister — despite the bank’s independent operations.
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 Global News.
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.”