Bank of Canada Unlikely to Raise Interest Rates Amid Slow Economic Growth

The Bank of Canada Expected to Hold Key Interest Rate Steady Amid Slower Economic Growth

Introduction

OTTAWA — The Bank of Canada is expected to keep its key interest rate unchanged this week as the Canadian economy grapples with higher interest rates and a downward trend in inflation. Despite the central bank’s previous indication that it may consider more rate hikes, recent economic data and inflation numbers suggest a different outcome. The central bank’s decision will be based on a variety of factors, including the country’s economic performance, inflation rates, and global uncertainties.

Current Economic Situation in Canada

The Canadian economy contracted in the second quarter and the weakness is expected to persist for the rest of the year and into 2024. This outlook is supported by the Bank of Canada’s recent business outlook survey, which showed a continued weakening in business sentiment and expectations of slowed sales growth. Furthermore, the pace of consumer spending has slowed, as evident from a decline in retail sales. These trends are believed to be a consequence of previous rate hikes, which have affected the purchasing power of Canadians and businesses.

Impact of Higher Interest Rates

As the Bank of Canada has raised interest rates, the effect is starting to be felt by households and businesses. Notably, mortgage holders are particularly vulnerable to higher rates, and as more households begin to renew their mortgages, the impact is expected to weigh on the finances of many Canadians. This has prompted Ontario Premier Doug Ford to express concerns in letters to Bank of Canada Governor Tiff Macklem and Prime Minister Justin Trudeau. Ford highlights the burden that increased mortgage costs are placing on families, forcing them to make difficult choices between essentials. He calls for measures to address the root causes of inflation.

Inflation and Monetary Policy

While inflation rates have shown some volatility in recent months, the Bank of Canada expects the current weaker economic conditions to eventually bring inflation back down to its target of two per cent. Although core inflation remains a concern, it is anticipated that the central bank’s decision will focus more on when to cut rates rather than further increasing them. The Bank’s quarterly monetary policy report, which will be released alongside the interest rate decision, will include updated forecasts for both the global and domestic economies, as well as for inflation.

International Uncertainties

Beyond domestic factors, global economic uncertainties also play a significant role in shaping the Bank of Canada’s decision-making. One such concern is the Israel-Hamas war, which has the potential to destabilize the Middle East and create inflationary pressures. The conflict, if escalated, can disrupt commodity prices and have broader implications. The Bank of Canada is keenly aware of the impact of global events on inflation, as demonstrated by the Russian invasion of Ukraine in 2022, which led to a significant increase in commodity prices.

Central Bank’s Response

Bank of Canada Governor Tiff Macklem has stated that it is too early to determine the economic repercussions of the Israel-Hamas war. The central bank remains watchful of the situation and will factor in any potential economic effects into its decision-making process.

Conclusion

Given the current economic conditions, it is widely expected that the Bank of Canada will keep its key interest rate unchanged, prioritizing stability over further hikes. The sluggish economic growth, coupled with concerns about inflation and global uncertainties, have influenced this decision. It is essential for the central bank to carefully assess economic indicators, monitor inflation rates, and consider both domestic and international factors to maintain a balanced and sustainable monetary policy approach.