Bank of Canada Holds Rates at 5%! What Does It Mean for You?

The Bank of Canada has decided to maintain its benchmark interest rate at five percent as the economy exhibits increasing signs of cooling. This decision aligns with expectations among economists and financial experts, given the central bank's swift rate hikes since early 2022, which have made significant progress in curbing runaway inflation.

However, it's worth noting that the full impact of rate adjustments can take up to 18 months to materialize. With the lending rate having risen from nearly zero to five percent in just a year and a half, there is a potential risk of overshooting and excessively slowing down the economy.

Recent financial indicators strongly indicate this possibility. July's job data, released at the beginning of August, revealed a loss of approximately 6,000 jobs in Canada, causing a slight uptick in the unemployment rate to 5.5 percent. Furthermore, later in the same month, Statistics Canada reported a contraction in Canada's GDP during the second quarter of 2023. This marks the first economic shrinkage since the onset of the pandemic and suggests that the economy may be on the verge of at least a mild recession.

While the economic deceleration is seen as a positive development for the central bank's efforts to bring inflation back to its two percent target, the Bank of Canada remains vigilant. In its accompanying statement, it expressed ongoing concerns about the persistence of underlying inflationary pressures and affirmed its readiness to further increase the policy interest rate if necessary.