Bank of Canada Holds at 5% in Potential End to Historic Hikes

The Bank of Canada held interest rates steady and kept the door open to further hikes, with economists seeing its historic tightening cycle at its likely endpoint.

(Bloomberg) — The Bank of Canada held interest rates steady and kept the door open to further hikes, with economists seeing its historic tightening cycle at its likely endpoint.

Policymakers led by Governor Tiff Macklem maintained the benchmark overnight lending rate at 5% on Wednesday, the highest level in 22 years. They acknowledged a rapid downshift in the economy and warned that price pressures are proving tough to wrestle all the way back to their target. 

“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 bank said. Officials, however, remain “concerned about the persistence” of underlying inflation and are “prepared to increase the policy rate further if needed.”

The move was expected by economists in a Bloomberg survey and market reaction was muted. The loonie dipped, trading at C$1.3660 per US dollar at 12:11 p.m. Ottawa time. Yields on benchmark Canada two-year bonds were up slightly to 4.701%.

While the rate statement suggests policymakers are comfortable waiting to assess how the deteriorating economy will restore price stability, officials are still bothered enough by the persistent momentum in inflation to remain cautious.

They’re also weighing the cumulative impact of 475 basis points of hikes since March 2022. Keeping a hawkish bias this time around contrasts with January’s explicit pause signal and is likely enough to keep premature bets on rate cuts at bay — especially if Macklem is able to reinforce his inflation worries in a speech and press conference Thursday in Calgary.

Most analysts think the Bank of Canada is finished raising rates. 

“We doubt it will need to follow through” with another hike, Stephen Brown, an economist at Capital Economics, said in a report to investors. Doug Porter, chief economist at Bank of Montreal, agreed, arguing that “unless growth rebounds in Q3 — which we doubt — the BOC is likely done with rate hikes.”

Economists surveyed by Bloomberg before the decision see the bank’s next move as a cut in April of next year.

In a rare public reaction to a monetary policy decision minutes after it was released, Prime Minister Justin Trudeau’s government praised Macklem for holding interest rates steady.

“The Bank of Canada’s decision to maintain its overnight interest rate is welcome relief for Canadians,” Finance Minister Chrystia Freeland said in a statement. Though she noted she respects the central bank’s independence, she said she’d use all the tool at her disposal to “ensure that interest rates can come down as soon as possible.”

Her comments reflect the increasing political pressure policymakers face as they try to slow the economy without causing unnecessary financial harm. Before Wednesday’s decision, the premiers of Ontario, British Columbia, and Newfoundland and Labrador all urged Macklem to cease raising rates.

With many central banks globally nearing or at their terminal point for rates, Wednesday’s decision suggests Canada’s six-member panel may soon transition the debate to how long they need to hold instead of how restrictive policy should be.

On Tuesday, the Reserve Bank of Australia also kept its key interest rate unchanged and maintained a tightening bias. Consecutive pauses in that country imply a higher hurdle for any further hikes and suggest a surprise shift in economic data will be needed to prompt additional tightening.

After its January declaration, the Bank of Canada moved to the sidelines for five months. It resumed hiking in June and July after undaunted consumers drove unexpectedly strong economic growth. But there’s ample recent evidence the central bank has now done enough to cool excess demand.

Gross domestic product contracted at a 0.2% annualized rate in the second quarter, far below the bank’s estimate for a 1.5% expansion. The labor market is loosening — job vacancies are falling and the unemployment rate continues to tick up — and the housing market has slowed.

“The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures,” the bank said. “This reflected a marked weakening in consumption growth and a decline in housing activity, as well as the impact of wildfires in many regions of the country.”

But with wage growth stuck around 4% or 5%, and inflationary pressures remaining broad-based, policymakers are still seeing the difficulty in the last mile of returning inflation to the 2% target. “The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability.”

The bank kept the last three sentences of the rate statement the same, laying out key metrics policymakers will be monitoring, including the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior.

The central bank’s next decision is due Oct. 25, after double releases of jobs, inflation and retail data, as well as gross domestic product numbers for July and an August estimate.

(Updates with more economist reaction, freshens market moves.)

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