Bank of Canada keeps rates unchanged

The Bank of Canada has opted to keep its benchmark interest rate at five percent, marking the second consecutive occasion it has made this choice. This decision signifies a potential shift toward a more cautious stance after having raised interest rates ten times since the previous year. This move was largely anticipated by economists and investors closely monitoring the central bank, given a series of recent economic indicators suggesting a slowdown in the economy.

The central bank convenes eight times a year to determine the level of its benchmark rate, referred to as the target for the overnight rate. This rate significantly influences the rates at which retail banks can access short-term loans. Typically, the central bank raises its rate when it aims to cool down an overheated economy and lowers it when it seeks to stimulate borrowing, spending, and investment.

In response to the economic challenges posed by the pandemic, the bank initially reduced its rate to near-zero levels to support economic activity. However, in early 2022, the central bank changed course by embarking on a series of aggressive rate hikes to combat soaring inflation, which had reached its highest level in four decades. This significant increase in the borrowing cost, from virtually zero percent to five percent in just over a year and a half, put the brakes on spending and borrowing, effectively taming the inflation rate from 8.1 percent in the summer of 2022 to 3.8 percent the previous month.

From the central bank’s perspective, inflation appears to be moving in the right direction. Nevertheless, in its official statement announcing the decision, the bank underscores that it does not believe the inflationary pressures have been entirely subdued. The bank stated, “In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures.” Consumer spending has been subdued, with weakened demand in housing, durable goods, and various services.

The bank’s projections indicate that the economy will continue to cool down sufficiently to bring inflation back in line with its two percent target sometime in 2025. This forecast suggests that the bank is content to remain on the sidelines until this target is achieved.