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 for the third straight meeting, as expected, after the latest data showed the economy has been struggling to grow and the unemployment rate ticked up under the weight of the bank's earlier rate hikes.

At the same time, the central bank's policy board is"still concerned" that inflation may stay above its 2% inflation target, keeping its hawkish tone that it"remains prepared" to hike rates if needed. The bank has been in the process of refining its policy stance between over-tightening and under-tightening, and wishes to keep speculations for rate cuts down until it feels comfortable to say its tightening job is competently done.

The bank said on Wednesday that it is also continuing its policy of quantitative tightening to trim the bank's balance sheet to a normal level.

Deputy Governor Toni Gravelle will deliver a speech on the economic progress report at the Windsor-Essex Regional Chamber of Commerce in Ontario at 12:35 p.m. EST (1735 GMT) and hold a news conference at 2:10 p.m. EST (1910 GMT) on Thursday.

Governor Tiff Macklem said in a speech last month that the bank's policy interest rate may be"restrictive enough" to bring inflation back to 2 percent from just above 3 percent now but also noted there is no clear evidence yet that underlying inflation is on a downtrend. The upward pressure from services costs remains high, largely due to elevated mortgage rates, a result of the bank's aggressive rate hikes last year.

No change in policy for a third straight meeting was widely expected following a pause in both October and 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.

Some economists expect the bank will stay on the sidelines until July 2024 while others predict the bank will start cutting rates in April. Financial markets are pricing in rate cuts totaling about 100 basis points next year but the bank may be more cautious about shifting its policy stance so drastically.

Policymakers Still Concerned About Inflationary Risks; Prepared to Act If Needed

"With further 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, largely repeating its statement after the previous meeting in October.

"Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed," it said, compared to its October view that progress towards price stability was slow and inflationary risks had increased.

"Governing Council wants to see further and sustained easing in core inflation," the bank said after saying in October that the policy-setting panel wanted to see"downward momentum in core inflation."

The bank repeated that the policy board"continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour."

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 Jan. 24, when it will also release the quarterly Monetary Policy Report with its latest economic forecast and risk analysis.

The bank's current assessment is that"the global economy continues to slow and inflation has eased further" while in Canada,"economic growth stalled through the middle quarters of 2023."

"Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year," the bank said.

"The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly," it said, but quickly added that wages are still rising by 4 percent to 5 percent. In October, the bank said that"the labour market remains on the tight side and wage pressures persist."

"Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand," the bank said, indicating a shift from a few months ago, when it said"supply and demand in the economy are now approaching balance."

Sticky Underlying Inflation

"We need to see sustained evidence that underlying inflation is coming down to be more confident," Macklem told reporters last month."Underlying inflation is running at 3 percent and if we see that persist, that is still well above the target. There may be a need for higher interest rates."

Canada's CPI data has shown volatility. Overall consumer inflation eased to 3.1 percent in October from 3.8 percent in September after accelerating to 4.0 percent in August from 3.6 percent in July on higher energy prices. It had slowed to 2.8 percent in June, which was the lowest since 2.2 percent in March 2021 and a sharp drop from a recent peak of 8.1 percent hit in June 2022.

"What we are looking at is underlying inflation; we particularly use the core measures to look at that," the governor said."They've been running for the last number of months at 3.5 to 4( percent)."

Two of the BoC's core inflation measures have eased slightly. The year-over-year increase in the CPI trim decelerated to 3.5 percent in October from 3.7 percent in September and 3.9 percent in August. The annual rate of the CPI median also slowed to 3.6 percent in October from 3.8 percent in September and 4.1 percent in August. Those measures strip out whatever is volatile at the time.

Softer Labor Market, Flat GDP Growth

Data released on Friday showed the Canadian labor market is showing some softening.

Employment rose an above-forecast 24,900 in November, led by a jump in full-time jobs, following increases of 17,500 in October and 63,800 in September, while the unemployment rate edged up to 5.8 percent from 5.7 percent in October and 5.5 percent in September. The year-on-year increase in average hourly wages was steady at 4.8 percent in November after easing in October from 5.0 percent in September.

Thursday's GDP data pointed to flat growth in the six months to September.

The Canadian economy contracted 0.3 percent on quarter, or an annualized 1.1 percent in the July September quarter, much weaker than the consensus call of an annual 0.1 percent rise. April-June GDP was revised up sharply to 0.3 percent growth on quarter from being flat (-0.0 percent), or to an annualized 1.4 percent expansion from a 0.2 percent drop. The third quarter slump was led by declines in business investment and net exports as well as sluggish consumer spending.

In the monthly GDP data, the economy grew 0.1 percent on the month and Statistics Canada's advance estimate for October is a 0.2 percent increase, indicating a good start to the final quarter of 2023, and thus no immediate risk of a sharp downturn that would require a rate cut.

After holding rates steady at its October meeting, the Bank of Canada is once again expected to hold policy steady at its December meeting. Headline inflation has been falling though ex-food ex-energy prices, at 3.4 percent in October, have not been improving.

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.

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.