OTTAWA, Sept 6 (Reuters) – The Bank of Canada on Wednesday kept its key overnight interest rate at 5 percent, indicating the economy had entered a period of weaker growth, but said it could raise borrowing costs again if inflationary pressures hit. persist.
The central bank raised interest rates by a quarter of a percentage point in both June and July in an attempt to curb high inflation, which has remained above the bank’s 2% target for 27 months.
Canada’s gross domestic product unexpectedly contracted by an annualized 0.2% in the second quarter, a sign that the economy may already be entering a recession. But inflation accelerated in July to 3.3% and core measures remained at around 3.5%.
“With recent evidence that excess demand in the economy is declining, and given the delayed effects of monetary policy, the Governing Council decided to keep the interest rate at 5%,” the bank said in a statement.
The bank said it was prepared to raise interest rates further if inflationary pressures persist, but analysts said the hawkish stance was unlikely to mean further increases, at least not immediately.
“The bank has certainly left the door open to the possibility of raising interest rates, but unless growth rebounds in the third quarter — which we doubt — the Bank of Canada is likely to raise rates,” said Doug Porter, chief economist at BMO Capital Markets.
The Canadian dollar was trading down 0.1% to 1.3655 per dollar, or 73.23 US cents, after touching its lowest level in five months at 1.3676.
The Canadian two-year yield traded 6.3 basis points lower than its US counterpart, equivalent to a gap of 36.5 basis points in favor of the US paper.
Financial markets saw a 14% chance of a rate hike on Wednesday. Thirty-one of 34 economists polled by Reuters from August 24-30 expected no change to the central bank’s overnight interest rate at the meeting.
“We do not expect to see a rapid turnaround in economic activities, as growth is expected to remain on the slow side in the third quarter,” said Andrew Kelvin, chief Canadian strategist at TD Securities. “We expect they will also remain pending at the October and December meetings,” he added.
Bank of Canada Governor Tiff Macklem is scheduled to deliver a speech and hold a news conference to discuss the decision on Thursday.
The Bank of Canada said that because of the recent increase in gasoline prices, which are higher than it assumed when it presented its latest round of economic forecasts in July, inflation will rise in the near term before falling again.
On the other hand, interest rates at their highest levels in 22 years are restricting spending “among a wider range of borrowers,” and the economy “has entered a period of weaker growth, which is necessary to ease price pressures.”
Inflation reached a four-decade high of 8.1% last year, and the Bank of Canada has risen 10 times since March 2022 to try to get it back on target.
Support for Liberal Prime Minister Justin Trudeau has declined amid rising inflation as his Conservative rival Pierre Poilievre criticized him for stoking inflation with government spending and raising interest rates during the housing crisis.
“The Bank of Canada’s decision to maintain the overnight interest rate is a welcome relief for Canadians,” Finance Minister Chrystia Freeland said in a statement.
(Reporting by Steve Shearer and David Ljunggren) (Additional reporting by Fergal Smith, Ismail Shakeel, Divya Rajagopal and Nivedita Balu) Editing by Mark Porter
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