Unsurprisingly, the Bank of Canada is leaving its key rate unchanged at 5%, but it is keeping its finger on the trigger to raise it again if necessary.
After two consecutive hikes in June and July, the central bank’s decision to pause recognizes that the economy is no longer overheating, even though inflation, at 3.3%, is still above its target of 2%.
“Given recent signs that excess demand is diminishing in the economy, and as the effects of monetary policy are felt with a lag, the Governing Council has decided to maintain the policy rate at 5% and continue to normalize the Bank’s balance sheet,” its statement said.
This is not the end of rate hikes, warns the central bank. “The Board remains concerned about the persistence of underlying inflationary pressures and stands ready to raise the policy rate further if necessary,” she said.
The Bank of Canada wants to continue “assessing the dynamics of core inflation and the outlook for CPI inflation.” The evolution of excess demand, inflation expectations, wage growth and corporate pricing practices will be closely scrutinized to see if they are consistent with achieving the 2% inflation target .
The central bank expects the consumer price index to rise due to the recent rise in gasoline prices. The one-year and three-month measures of core inflation, which exclude the price of gasoline, are now around 3.5%, indicating that there has been almost no downward movement in underlying inflation recently, note the monetary authorities.
“The longer high inflation lasts, the more entrenched it is likely to be and the more difficult it becomes to restore price stability,” stresses the Bank of Canada, whose next interest rate decision is October 25.
Most economists expected the key rate to remain unchanged, after the release of a series of statistics indicating that the Canadian economy is seriously slowing. In the second quarter, Gross Domestic Product fell by 0.2%, while the Bank of Canada had forecast growth of 1.5%.
Retail sales, job creation and international trade are also showing signs of weakness.
