Bank of Canada Holds Rates at 5%, Sees Excess Demand Easing

The Bank of Canada held interest rates steady, but kept the door open to further hikes as inflation proves sticky.

(Bloomberg) — The Bank of Canada held interest rates steady, but kept the door open to further hikes as inflation proves sticky.

Policymakers led by Governor Tiff Macklem kept the benchmark overnight lending rate at 5% on Wednesday, the highest level in 22 years. The move was expected by economists in a Bloomberg survey and marks the third time policymakers sat on the sidelines this tightening cycle. Borrowing costs have jumped 475 basis points since March 2022.

“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 inflationary pressures” and are “prepared to increase the policy rate further if needed.”

The loonie dropped after the decision, reversing earlier gains to trade at C$1.3642 per US dollar at 10:11 a.m. Ottawa time. Bonds dipped, pushing the benchmark Canada two-year yield up to 4.664%.

While the rate pause and its accompanying statement suggest policymakers are comfortable waiting to assess whether the deteriorating economy will restore price stability, officials remain worried about persistent momentum in inflation. Keeping that hawkish bias may allow Macklem to avoid a repeat of January’s explicit pause signal, which led markets to quickly price in future rate cuts and rekindled Canada’s housing market.

Earl Davis, head of fixed income and money markets at Bank of Montreal’s global asset management division, said he still expects the central bank to hike at one of the two meetings before the end of the year.

“Their base case is that they don’t want to hike,” he said on BNN Bloomberg Television. “They see the damage going through the economy. They see the pain.” 

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.

Wage Growth 

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

Canada’s economy contracted in the second quarter, far below the bank’s estimate for a 1.5% annualized 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.

Macklem will shed more light on his team’s thinking and its outlook for the Canadian economy in a speech to the Calgary Chamber of Commerce on Thursday. The governor is scheduled to speak to reporters afterward.

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.

(Adds economist, market reaction.)

More stories like this are available on

©2023 Bloomberg L.P.