Policy interest rate stays put
Benchmark interest rate to remain at 5% for now
By Mark Parsons, ATB Economics 6 September 2023 2 min read
As expected, the Bank of Canada moved to the sidelines this morning, keeping its policy rate unchanged at 5.0%. The pause comes after two straight 0.25 percentage point increases in June and July.
The ‘data dependent’ Bank has been waiting for signs that the inflationary pressures caused by a resilient economy and tight labour market are subsiding.
In that vein, the Bank's decision was undoubtedly influenced by last week’s soft GDP reading. The economy unexpectedly contracted slightly (-0.2% annualized) in the second quarter, pulled down by lower housing investment and a sharp slowdown in consumer spending. The Bank’s forecast from July had a 1.5% increase. Moreover, since the last rate decision, the labour market has continued to show signs of easing, with July employment edging lower and the unemployment rate rising for the third straight month.
On balance, the string of soft economic data appeared to outweigh warning signs in other areas, namely the hotter-than-expected July inflation reading and still-elevated wage pressures.
The Bank’s language in today’s announcement acknowledges that Canada’s economy is slowing, and that this will help contain inflation: “The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures.” This is in contrast to the July rate hike announcement, which focused on the resilience of the economy: “Canada’s economy has been stronger than expected, with more momentum in demand.”
At the same time, the Bank flagged persistent wage growth and that “inflationary pressures remain broad-based.” While noting that ‘excess demand’ is easing, the Bank cautioned that it is prepared to raise rates again if inflation does not cooperate: “Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed.”
The Bank kept in its ‘resolute’ commitment to price stability language from its last statement and reiterated its data dependent stance, a reminder that it won’t be in any rush to lower rates until it is confident that the trend to the 2% inflation target is firmly on track.
Given the now apparent cooling effect of past rate hikes, our base case expectation is that the Bank will hold for the remainder of the year before cautiously lowering rates next year.
The Bank of Canada’s next rate decision is scheduled for October 25, 2023. By that time, it will have two more inflation readings, two more job reports, and GDP for July.
Answer to the previous trivia question: Going back to 1970, Canada posted its largest decline in annual real GDP in 2020 (-5.1%). The second largest decline was in 1980 (-3.2%).
Today’s trivia question: When did Tiff Macklem become the Governor of the Bank of Canada?