Many breathed a sigh of relief when the Bank of Canada announced no further rate hikes yesterday.
“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 on Wednesday.
However, the Bank of Canada is keeping the door open to more rate hikes and “is ready to raise interest rates further if needed.”
Inflation Woes
Recent CPI (Consumer Price Index) data indicate that inflationary pressures remain broad-based. After easing to 2.8% in June, CPI inflation moved up to 3.3% in July, averaging close to 3% in line with the Bank’s projection. With the recent increase in gas prices, CPI inflation is expected to be higher in the near term before easing again. Year-over-year and three-month measures of core inflation are now both running at about 3.5%, indicating there has been little recent downward momentum in underlying inflation. The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability.
With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5% and continue to normalize the Bank’s balance sheet. However, Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed.
Information note
The next scheduled date for announcing the overnight rate target is October 25, 2023.
