Bank of Canada Holds Interest Rate at 5% Amid Weaker Growth

Introduction

The Bank of Canada (BoC) has decided to keep its key overnight interest rate at 5% as the economy experiences a period of weaker growth. However, the bank has stated that it may raise borrowing costs again if inflationary pressures persist.

Economy and Inflation

• The Canadian economy unexpectedly shrank by 0.2% in the second quarter, indicating a possible recession.
• Inflation accelerated to 3.3% in July, remaining above the bank’s 2% target for 27 months.
• The bank stated that recent evidence suggests a decrease in excess demand, leading to the decision to hold the interest rate at 5%.

Future Rate Hikes

While the bank remains prepared to raise rates further if inflationary pressures continue, analysts believe that more increases are unlikely in the near future.

Chief economist Doug Porter at BMO Capital Markets stated, “The Bank has certainly left the door ajar to the possibility of more hikes, but unless growth rebounds in Q3 – which we doubt – the BoC is likely done with rate hikes.”

Market Reactions

Following the announcement, the Canadian dollar traded 0.1% lower at 1.3655 to the greenback. The Canadian 2-year yield also traded lower compared to its U.S. equivalent.

Money markets had predicted a 14% chance of a rate hike on this occasion.

Future Outlook

Analysts do not expect a quick turnaround in economic activities, with growth expected to remain slow in the third quarter. They anticipate that the bank will maintain the interest rate at the October and December meetings.

Speech and Press Conference

Bank of Canada Governor Tiff Macklem will deliver a speech and hold a press conference to discuss the interest rate decision on Thursday.

Inflation and Government Spending

The Bank of Canada expects inflation to increase in the near term due to higher gasoline prices. However, interest rates at a 22-year high are restraining spending among a wider range of borrowers.

Political Impact

Prime Minister Justin Trudeau’s support has declined due to high inflation. His Conservative rival, Pierre Poilievre, has criticized him for fueling inflation with government spending and driving up rates during a housing crisis.

Conclusion

The Bank of Canada’s decision to maintain the overnight interest rate at 5% provides relief for Canadians. The bank will continue to monitor inflationary pressures and make further adjustments if necessary.

Reporting by Steve Scherer and David Ljunggren; Additional reporting by Fergal Smith, Ismail Shakil, Divya Rajagopal, and Nivedita Balu; Editing by Mark Porter

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