The Bank of Canada Holds Rate at 5% but Warns About Rate Increases Later Down the Road.
The Bank of Canada has chosen to maintain its benchmark interest rate at 5%, marking the second consecutive time it has refrained from raising it. This signals a potential shift to a more cautious stance after increasing rates ten times since the previous year.
This decision aligns with expectations from economists and investors, as recent economic indicators, including GDP, employment, and inflation, have suggested a slowdown in the economy.
The central bank meets eight times annually to determine the target for the overnight rate, influencing the rates that retail banks offer for short-term loans. Typically, the bank raises rates to cool an overheated economy and reduces them to stimulate borrowing and spending.
In response to the economic impact of the pandemic, the bank initially lowered rates, but in early 2022, it began a series of rate hikes to combat high inflation, which had reached its highest level in 40 years.
Source: Bank of Canada, Stats Canada
While the bank acknowledges progress in taming inflation, it remains cautious. It noted that past rate increases have dampened economic activity, with subdued consumption and softer demand for housing and durable goods. The bank projects that the economy will continue to cool, aiming to bring inflation back to its 2% target by 2025.
However, the bank did leave the possibility of another rate hike open, emphasizing its readiness to increase the policy rate further if necessary. Still, the market indicates a low likelihood of a rate hike in the near future.
Several experts believe that the bank is done with rate hikes but is hesitant to confirm this publicly, as it may lead to the expectation of rate cuts. They are striving to strike a balance between controlling inflation and preventing potential harm to the economy.
For homeowners, the impact of rising interest rates has been significant, leading to increased mortgage costs. Many are hoping for rate relief in the future, but they are also adapting to the new financial reality. Mortgage professionals and Canadians have criticized the central bank for its initial guidance on low rates, followed by a rapid series of rate hikes.
Photos From Bank of Canada
