| Consensus | Actual | Previous | |
|---|---|---|---|
| Change | 0bp | 0bp | 25bp |
| Level | 5.00% | 5.00% | 5.00% |
Highlights
The Bank of Canada on Wednesday maintained its policy interest rate -- the target for overnight lending rates -- at a 22-year high of 5.0 percent on Wednesday after two consecutive rate hikes in the wake of weak second quarter GDP data, but the bank's policymakers also kept their hawkish tone, leaving the outlook uncertain as to whether the bank is done with credit tightening launched 18 months ago.
The no change in policy was widely expected after the bank raised the key rate by 25 basis points each in July and June, when BOC policymakers said the risk of under-tightening would be greater than over-tightening.
The bank said it is also continuing its policy of quantitative tightening.
The latest policy decision came against the backdrop of still elevated core inflation in major economies and slowing global economic growth in the second quarter of 2023, largely reflecting a significant deceleration in China. Global bond yields have risen, reflecting higher real interest rates, and international oil prices are higher than was assumed in the bank's quarterly projection provided in July.
Policymakers Wary of Underlying Inflation, Prepared to Act If Needed
"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 percent and continue to normalize the Bank's balance sheet," the bank said in a statement."However, Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed."
"Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation," the bank said, repeating its July statement."In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the 2 percent inflation target."
The BoC has risen its target for overnight lending rates by a total of 475 basis points (4.75 percentage points) since March 2022, jacking up the key rate through 10 increases from its record low of 0.25 percent. Before today's decision, the bank only paused twice, in March and April this year, during the current tightening cycle aimed at bringing inflation back to the 2 percent target.
The BoC will announce its next policy decision on Oct. 25.
Canadian Economy Now in Weaker Growth Period
"The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures," the bank said.
"Household credit growth slowed as the impact of higher rates restrained spending among a wider range of borrowers," it noted."The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4 percent to 5 percent."
Data released Friday showed the Canadian economy unexpectedly contracted in the April-June quarter, being flat (-0.0 percent) on quarter, or dipping an annualized 0.2 percent, following solid 0.6 percent growth (2.6 percent annualized) in January-March. Household spending was sluggish, growing just 0.1 percent on quarter (0.2 percent annualized) after surging 1.2 percent (4.7 percent annualized) in the previous quarter. It was also due to a decline in housing activity and the drag from wildfires in many regions of the country.
In its quarterly Monetary Policy Report (MPR) released in July, the bank forecast that Canada's GDP would grow at an annualized pace of 1.5 percent in April-June on resilient consumer spending, and that solid growth would continue at 1.5 percent in July-September. But the latest data suggests otherwise: The GDP fell 0.2 percent on quarter in June and the advance estimate by Statistics Canada is a flat reading for July. The GDP contracted slightly at an annualized 0.1 percent in October-December.
The BoC's latest forecast made in July is that Canada's GDP will grow 1.8 percent this year before slowing to 1.2 percent next year and picking up to 2.4 percent in 2025. The bank's policymakers will update their medium-term projections in their next MPR due on Oct. 25.
Inflationary Pressures Broad-Based, CPI Set to Rise in Near Term
"Recent CPI data indicate that inflationary pressures remain broad-based," the banks said on Wednesday.
"With the recent increase in gasoline prices, CPI inflation is expected to be higher in the near term before easing again," it warned."Year-over-year and three-month measures of core inflation are now both running at about 3.5 percent, 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," the bank said, repeating its concern.
After the July rate hike, Bank of Canada Governor Tiff Macklem told a news conference that"monetary policy is working" as consumer inflation had come down to 3.4 percent in May from a recent peak of 8.1 percent hit in June last year. But he quickly added that"underlying inflationary pressures are proving more stubborn." Since then, the year-on-year increase in the total CPI eased further to 2.8 percent in June but ticked up to 3.3 percent in July, averaging close to 3 percent in line with the bank's projection.
In the bank's quarterly Monetary Policy Report for July, CPI inflation is forecast to be around 3 percent next year before gradually declining to 2 percent in the middle of 2025.
Two of the BoC's core inflation measures have eased only slightly. The year-over-year increase in the CPI trim decelerated to 3.6 percent in July from 3.7 percent in June, reaching the lowest since 3.5 percent in November 2021. The annual rate of the CPI median was steady at 3.7 percent for a second straight month in July, staying above 3.5 percent seen in January 2022, when the world had not seen the impact of Russia's invasion of Ukraine on energy and commodity prices. Those measures strip out whatever is volatile at the time.
The latest data showed that Canada's labor market is showing further signs of cooling after a strong start to the year. Employment unexpectedly declined 6,400 in July after surging 59,900 in June while and the unemployment rate continued to rise to 5.5 percent from 5.4 percent in June and 5.2 percent in May, up from the multi-decade low of 4.9 percent hit a year earlier.
The August jobs data due on Friday is expected to show employment will rebound by 20,000 from but that the jobless rate will also rise to 5.6 percent.
Macklem said in July that the bank's policymakers are trying to balance the risks of under- and over-tightening monetary policy."If we don't do enough now, we will likely have to do even more later," he said."If we do too much, we risk making economic conditions unnecessarily painful for everybody."
At the time, the governor said the bank would be taking each decision based on the information available at the time.
The no change in policy was widely expected after the bank raised the key rate by 25 basis points each in July and June, when BOC policymakers said the risk of under-tightening would be greater than over-tightening.
The bank said it is also continuing its policy of quantitative tightening.
The latest policy decision came against the backdrop of still elevated core inflation in major economies and slowing global economic growth in the second quarter of 2023, largely reflecting a significant deceleration in China. Global bond yields have risen, reflecting higher real interest rates, and international oil prices are higher than was assumed in the bank's quarterly projection provided in July.
Policymakers Wary of Underlying Inflation, Prepared to Act If Needed
"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 percent and continue to normalize the Bank's balance sheet," the bank said in a statement."However, Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed."
"Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation," the bank said, repeating its July statement."In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the 2 percent inflation target."
The BoC has risen its target for overnight lending rates by a total of 475 basis points (4.75 percentage points) since March 2022, jacking up the key rate through 10 increases from its record low of 0.25 percent. Before today's decision, the bank only paused twice, in March and April this year, during the current tightening cycle aimed at bringing inflation back to the 2 percent target.
The BoC will announce its next policy decision on Oct. 25.
Canadian Economy Now in Weaker Growth Period
"The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures," the bank said.
"Household credit growth slowed as the impact of higher rates restrained spending among a wider range of borrowers," it noted."The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4 percent to 5 percent."
Data released Friday showed the Canadian economy unexpectedly contracted in the April-June quarter, being flat (-0.0 percent) on quarter, or dipping an annualized 0.2 percent, following solid 0.6 percent growth (2.6 percent annualized) in January-March. Household spending was sluggish, growing just 0.1 percent on quarter (0.2 percent annualized) after surging 1.2 percent (4.7 percent annualized) in the previous quarter. It was also due to a decline in housing activity and the drag from wildfires in many regions of the country.
In its quarterly Monetary Policy Report (MPR) released in July, the bank forecast that Canada's GDP would grow at an annualized pace of 1.5 percent in April-June on resilient consumer spending, and that solid growth would continue at 1.5 percent in July-September. But the latest data suggests otherwise: The GDP fell 0.2 percent on quarter in June and the advance estimate by Statistics Canada is a flat reading for July. The GDP contracted slightly at an annualized 0.1 percent in October-December.
The BoC's latest forecast made in July is that Canada's GDP will grow 1.8 percent this year before slowing to 1.2 percent next year and picking up to 2.4 percent in 2025. The bank's policymakers will update their medium-term projections in their next MPR due on Oct. 25.
Inflationary Pressures Broad-Based, CPI Set to Rise in Near Term
"Recent CPI data indicate that inflationary pressures remain broad-based," the banks said on Wednesday.
"With the recent increase in gasoline prices, CPI inflation is expected to be higher in the near term before easing again," it warned."Year-over-year and three-month measures of core inflation are now both running at about 3.5 percent, 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," the bank said, repeating its concern.
After the July rate hike, Bank of Canada Governor Tiff Macklem told a news conference that"monetary policy is working" as consumer inflation had come down to 3.4 percent in May from a recent peak of 8.1 percent hit in June last year. But he quickly added that"underlying inflationary pressures are proving more stubborn." Since then, the year-on-year increase in the total CPI eased further to 2.8 percent in June but ticked up to 3.3 percent in July, averaging close to 3 percent in line with the bank's projection.
In the bank's quarterly Monetary Policy Report for July, CPI inflation is forecast to be around 3 percent next year before gradually declining to 2 percent in the middle of 2025.
Two of the BoC's core inflation measures have eased only slightly. The year-over-year increase in the CPI trim decelerated to 3.6 percent in July from 3.7 percent in June, reaching the lowest since 3.5 percent in November 2021. The annual rate of the CPI median was steady at 3.7 percent for a second straight month in July, staying above 3.5 percent seen in January 2022, when the world had not seen the impact of Russia's invasion of Ukraine on energy and commodity prices. Those measures strip out whatever is volatile at the time.
The latest data showed that Canada's labor market is showing further signs of cooling after a strong start to the year. Employment unexpectedly declined 6,400 in July after surging 59,900 in June while and the unemployment rate continued to rise to 5.5 percent from 5.4 percent in June and 5.2 percent in May, up from the multi-decade low of 4.9 percent hit a year earlier.
The August jobs data due on Friday is expected to show employment will rebound by 20,000 from but that the jobless rate will also rise to 5.6 percent.
Macklem said in July that the bank's policymakers are trying to balance the risks of under- and over-tightening monetary policy."If we don't do enough now, we will likely have to do even more later," he said."If we do too much, we risk making economic conditions unnecessarily painful for everybody."
At the time, the governor said the bank would be taking each decision based on the information available at the time.
Market Consensus Before Announcement
The Bank of Canada is expected to hold policy steady at its September meeting. The BoC took a pause at its April meeting but then resumed tightening with 25-basis-point moves in both June and July.
Definition
Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.
Description
Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
