UPDATE 1-Bank of Canada holds rates, still fretting about inflation outlook

By Steve Scherer and David Ljunggren

OTTAWA, Dec 6 (Reuters) – The Bank of Canada on Wednesday held its key overnight rate at 5% and left the door open to another hike, saying it was still concerned about inflation while acknowledging an economic slowdown and a general easing of prices.

The central bank raised rates by a quarter point in both June and July to a 22-year-high and has left them on hold in the three policy-setting meetings since. Inflation slowed to 3.1% in October, down from a peak of more than 8% last year, but it has remained above the bank’s 2% target for 31 months.

“Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed,” the Bank of Canada (BoC) said in an unusually curt, five-paragraph statement.

It said it wanted to see a “further and sustained easing in core inflation”.

The statement dropped language used in its previous policy statement, which said “progress towards price stability is slow and inflationary risks have increased”.

The BoC instead noted on Wednesday that labor market pressures had eased and growth stalled during the middle part of the year, leaving the economy no longer in excess demand.

“Higher interest rates are clearly restraining spending,” the BoC said. Oil prices are about $10 lower per barrel than it had forecast in October.

“The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices,” the BoC said, noting October core inflation was at the low end of a range seen in recent months.

Money markets are betting there could be a rate cut as early as March. Governor Tiff Macklem though has said the BoC is not even thinking about easing yet because inflation is still well above target.

The BoC forecast in October that inflation would hover around 3.5% until mid-2024, before inching down to its 2% target in late 2025. Macklem last month said interest rates might be at their peak, given excess demand had vanished and weak growth was expected to persist for many months.

Canada’s economy unexpectedly contracted at an annualized rate of 1.1% in the third quarter, avoiding a recession, but most economists forecast that upcoming mortgage renewals at higher rates will take another chunk out of growth next year.

The BoC will start cutting rates in the second quarter of 2024 as inflation and the economy slow, according to a Reuters poll published last week.

Deputy Governor Toni Gravelle will deliver a speech explaining the Bank’s reasoning in a speech and a news conference on Thursday.

(Reporting by Steve Scherer and David Ljunggren)

((Reuters Ottawa bureau, +1 647 480 7921; david.ljunggren@tr.com))