| Consensus | Actual | Previous | |
|---|---|---|---|
| Change | 0bp | 0bp | 0bp |
| 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 in the face of a dimmer business outlook and gradually easing price pressures, but left the door open for further credit tightening to bring inflation back down to its 2 percent target as core inflation is proving to be more stubborn than expected.
No change in policy was widely expected following a pause in September, a 25- basis point hike each in July and June, a conditional pause in April and March and an eighth consecutive increase in January.
The bank said it is also continuing its policy of quantitative tightening to trim the bank's balance sheet to a normal level.
"Inflation has come down a lot since the summer of 2022, but as every Canadian knows, inflation is still too high," Governor Tiff Macklem told a news conference."
"We held our policy rate steady today because monetary policy is working to cool the economy and relieve price pressures, and we want to give it time to do its job," he said."But further easing in inflation is likely to be slow, and inflationary risks have increased."
Macklem repeated his recent remarks that the bank's policymakers are trying to balance the risks of under- and over-tightening monetary policy. He also said last month that policy decisions were becoming difficult.
"Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance," the bank said in a statement on Wednesday.
In the bank's October projection, CPI inflation is expected to average about 3.5 percent through the middle of next year before gradually easing to 2 percent in 2025."Inflation returns to target about the same time as in the July projection, but the near-term path is higher because of energy prices and ongoing persistence in core inflation," the bank said.
"With clearer signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5 percent and to continue to normalize the Bank's balance sheet," the bank said.
"However, Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed," it said. Last month, the bank said the policy-setting panel remained concerned about the persistence of underlying inflationary pressures, and was prepared to increase the policy interest rate further if needed.
"Governing Council wants to see downward momentum in core inflation, and continues to be focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour," the bank said, largely repeating its statements issued in September and July.
If those factors are normalized,"We probably don't have to raise interest rates," Macklem said."But we've been very deliberate. We are leaving the door open to a further interest rate increase because there is uncertainty about that. And if we see inflationary pressures persist, we are prepared to raise our interest rate further."
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.
The bank will announce its next policy decision on Dec. 6.
No change in policy was widely expected following a pause in September, a 25- basis point hike each in July and June, a conditional pause in April and March and an eighth consecutive increase in January.
The bank said it is also continuing its policy of quantitative tightening to trim the bank's balance sheet to a normal level.
"Inflation has come down a lot since the summer of 2022, but as every Canadian knows, inflation is still too high," Governor Tiff Macklem told a news conference."
"We held our policy rate steady today because monetary policy is working to cool the economy and relieve price pressures, and we want to give it time to do its job," he said."But further easing in inflation is likely to be slow, and inflationary risks have increased."
Macklem repeated his recent remarks that the bank's policymakers are trying to balance the risks of under- and over-tightening monetary policy. He also said last month that policy decisions were becoming difficult.
"Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance," the bank said in a statement on Wednesday.
In the bank's October projection, CPI inflation is expected to average about 3.5 percent through the middle of next year before gradually easing to 2 percent in 2025."Inflation returns to target about the same time as in the July projection, but the near-term path is higher because of energy prices and ongoing persistence in core inflation," the bank said.
"With clearer signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5 percent and to continue to normalize the Bank's balance sheet," the bank said.
"However, Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed," it said. Last month, the bank said the policy-setting panel remained concerned about the persistence of underlying inflationary pressures, and was prepared to increase the policy interest rate further if needed.
"Governing Council wants to see downward momentum in core inflation, and continues to be focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour," the bank said, largely repeating its statements issued in September and July.
If those factors are normalized,"We probably don't have to raise interest rates," Macklem said."But we've been very deliberate. We are leaving the door open to a further interest rate increase because there is uncertainty about that. And if we see inflationary pressures persist, we are prepared to raise our interest rate further."
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.
The bank will announce its next policy decision on Dec. 6.
Market Consensus Before Announcement
The Bank of Canada is expected to hold interest rates steady in Wednesday's policy announcement as the latest CPI data showed inflation eased to 3.8 percent in September after accelerating to 4.0 percent in August from 3.3 percent in July. But the bank may not be done with tightening that began in March last year as the inflation outlook remains uncertain.
Last month, the bank maintained its policy interest rate -- the target for overnight lending rates -- at a 22-year high of 5.0 percent after two consecutive rate hikes, in the wake of weak second quarter GDP data. But Governing Council said it"remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed." It is closely monitoring the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior.
Governor Tiff Macklem told reporters a day after the September rate announcement that the bank's policy decisions were becoming difficult."We know Canadians are feeling the pain of higher interest rates but the target is in sight," he said."The destination (the 2 percent inflation target) is worth it and we need to stay the course."
The BoC will also release the quarterly Monetary Policy Report to provide its latest growth and inflation outlook as well as risk analysis. In July, the bank raised its inflation forecast for 2023 to 3.7 percent from 3.5 percent projected in April and revised up its 2024 CPI forecast to 2.5 percent from 2.3 percent. It forecast that inflation should decline gradually to the 2 percent target in the middle of 2025, which is about six months later than expected in April.
Last month, the bank maintained its policy interest rate -- the target for overnight lending rates -- at a 22-year high of 5.0 percent after two consecutive rate hikes, in the wake of weak second quarter GDP data. But Governing Council said it"remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed." It is closely monitoring the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior.
Governor Tiff Macklem told reporters a day after the September rate announcement that the bank's policy decisions were becoming difficult."We know Canadians are feeling the pain of higher interest rates but the target is in sight," he said."The destination (the 2 percent inflation target) is worth it and we need to stay the course."
The BoC will also release the quarterly Monetary Policy Report to provide its latest growth and inflation outlook as well as risk analysis. In July, the bank raised its inflation forecast for 2023 to 3.7 percent from 3.5 percent projected in April and revised up its 2024 CPI forecast to 2.5 percent from 2.3 percent. It forecast that inflation should decline gradually to the 2 percent target in the middle of 2025, which is about six months later than expected in April.
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.
