Recent data indicates that the 5% rate is helping steadily moderate the economy, according to the central bank
The Bank of Canada has said that it remains cautious of over-tightening, and that it will continue to be on the lookout for evidence that its rate hikes are now sufficient to keep inflation levels down.
Keeping the policy rate at 5% was the sound decision “to balance the risks of over- and under-tightening,” the BoC said in the just-released summary of deliberations during its September 6 policy rate announcement.
“Economic data showed clearer indications that policy was gaining traction and demand was slowing, and [Governing Council] recognized that the economy will still feel some further impact from past policy tightening,” the central bank said.
At the same time, “given the uncertain path forward for core inflation, tighter policy should remain a potential option until [the BoC sees] convincing evidence that slowing demand is translating into reduced core inflationary pressures.”
The central bank acknowledged that the decision to freeze rates might be misinterpreted by certain observers that the hikes have ended and that lower rates would soon follow.
“[Governing Council] agreed that they did not want to raise expectations of a near-term reduction in interest rates, given that they only considered keeping the policy rate where it is or raising it further,” the BoC said.
RBC Economics predicts North American central banks, like the Bank of Canada and the US Federal Reserve, are unlikely to swiftly cut interest rates despite global economic slowdowns.
— Canadian Mortgage Professional Magazine (@CMPmagazine) September 18, 2023
Read more: https://t.co/teny9FO7Hp#mortgageindustry #economicoutlook #interestrates
BoC reiterates “wait-and-see” approach
The central bank said that it will maintain its stance of continuously assessing “the dynamics of core inflation and the outlook for CPI inflation.”
“In doing so, members [of Governing Council] agreed that they will continue to evaluate whether the following indicators evolve in a direction that is consistent with achieving the inflation target: excess demand, inflation expectations, growth of labour costs, and company price-setting behaviour,” the BoC said.
The central bank added that at this point, more data will be “especially helpful” in evaluating whether the slowing demand translates into less inflationary pressure.
“Policy might not yet be restrictive enough and that, by waiting to act, [the central bank runs] the risk of having inflationary psychology become entrenched in Canada. This would mean [Governing Council] would need to tighten policy even further in the future,” it said.
