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Bank of Canada Governor Tiff Macklem is seen during a press conference in this file photo. On Wednesday, the central bank left interest rates unchanged.SEAN KILPATRICK/THE CANADIAN PRESS
The Bank of Canada has hit pause on its rate-hike campaign, holding its benchmark interest rate steady at 5 per cent in response to growing evidence that the Canadian economy has begun to stall.
At the same time, the central bank said it remains worried about stubborn inflation and has left the door open to future rate hikes if consumer price growth accelerates again.
The widely anticipated decision offers some respite to homeowners and other borrowers, who have been hammered by rising interest rates over the past 18 months, including hikes in June and July. The bank has raised interest rates 10 times since March, 2022, the most aggressive monetary policy tightening campaign in decades, in a bid to get runaway prices under control.
Annual Consumer Price Index inflation remains above the central bank’s 2-per-cent target, clocking in at 3.3 per cent in July. But weak economic data over the past month has given the bank confidence to move back to the sidelines and wait for high borrowing costs and slower economic activity to pull down inflation.
“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 policy interest rate at 5 per cent and continue to normalize the bank’s balance sheet,” the bank said in its rate announcement.
Live updates: Bank of Canada holds key interest rate steady at 5%
“However, Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed,” it said.
Finance Minister Chrystia Freeland praised the bank’s decision, calling it a “welcome relief for Canadians.” The statement was highly unusual given the norms of central bank independence: Federal ministers typically refrain from commenting directly on monetary policy to avoid being seen as unduly influencing the Bank of Canada’s decision-making.
In recent days, a number of high-ranking politicians have criticized the Bank of Canada’s handling of monetary policy, including Ontario premier Doug Ford and British Columbia premier David Eby, who both sent letters to the bank urging it to stop raising interest rates.
Private-sector economists and bond traders widely believe Canadian interest rates have peaked, and the debate on Bay Street is shifting toward how long the central bank will keep rates at the current level. Many analysts believe it won’t start cutting interest rates, which are the highest they’ve been since 2001, until the second quarter of next year.
“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,” Bank of Montreal chief economist Douglas Porter said in a note to clients.