By Ketki Saxena
Investing.com -- Earlier today, the Bank of Canada held its overnight lending rate steady at 5%, citing signs of a weakening economy and cooling labour market as the rationale for keeping rates steady.
“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 in a statement accompanying the announcement.
However, the Bank also warned that the "Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed."
The Bank highlighted that it will continue to remain data-dependent in its monetary policy decisions going forward: “In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target", as per the statement.
In short, the Bank of Canada has held rates steady but remains ready to hike again if needed. Meanwhile, the Canadian economy has weakened, the labour market is cooling, and inflation (including core measures) remain above 3%.
All eyes are now on what comes next, with many economists now believing that the Canadian central bank has reached it's terminal rate.
Here's a roundup of economist commentary.
James Knightley, Chief International Economist, ING
"As such, we have a hawkish hold with the BoC prepared to hike again 'if needed". We think they won't need to and rates have peaked at these levels as high exposure to borrowing and the lagged effects of monetary policy tightening become increasingly apparent."
Nathan Janzen, Assistant Chief Economist, Royal Bank of Canada (TSX:RY)
"The BoC remains highly data-dependent and won't hesitate to push interest rates higher if necessary to return inflation to the 2% target rate. And there are two additional labour market reports and two additional inflation reports before the next scheduled decision in October. But we continue to expect that the recent soft-patch in economic data will continue, and look for the overnight rate to hold where it is through the end of this year"
Randall Bartlett, Senior Director of Canadian Economics, Desjardins
"Reading the tea leaves of the press release that accompanied the announcement, it seems that the Bank is confident it has done enough to gradually bring the Canadian economy back to balance. And we agree. Now it’s just a waiting game as the Bank of Canada surveys the impact of past hikes on economic activity."
"Once the Bank’s satisfied the economy has slowed enough to support a gradual return of inflation to its 2% target, we expect it to begin cutting interest rates. This may happen as early as the first quarter of 2024."
Douglas Porter , Chief Economist and Managing Director, Economics, BMO (TSX:BMO)
"The Bank has certainly left the door ajar to the possibility of more hikes, but unless growth rebounds in Q3—which we doubt—the BoC is likely done with rate hikes. The softer growth backdrop will bring inflation back to 2% over time in our view and in the BoC's models, even if the short-term CPI outlook is much more problematic."
"Holding rates steady at the next meeting will require some nerve as the next two CPI reports could see headline inflation approach 4%"