Bank of Canada Holds Interest Rate at 5%

Emmet McGonagle

Sep 07, 2023

The Bank of Canada is holding its overnight lending rate at a 22-year high of 5% - the highest level in 22 years - following a Statistics Canada report which showed signs of a weakening economy.


In their rate announcement, the bank said: “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 five per cent and continue to normalize the Bank’s balance sheet. 


“However, governing council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed.”


However, the bank has kept the door open to further hikes and “will continue to assess the dynamics of core inflation and the outlook for CPI inflation”.


‘Unlikely to Hike Again’


Speaking of the announcement, macroeconomist Brett House commented via LinkedIn: “If individuals and businesses think inflation is going to stay high, then the perceived cost of borrowing will be too low, and high posted rates won’t have the dampening effect on demand and prices that the bank is trying to engineer.”


As Brett notes, economic decisions on borrowing are driven by the real interest rate, which is calculated by taking headline posted borrowing rates and subtracting from them the expected rate of inflation.


“This is why the Bank can’t say it’s done hiking, even though Canada’s underlying fundamentals imply that the Bank’s job is done,” Brett continued. “It will have to keep talking tough in its remaining 2023 rate decisions in October and December to push down all of our inflation expectations. But given the slowdown in Canada’s economy, it’s unlikely to hike again.”


Statistics Canada report found that Canada's economy shrank at a 0.2% annualised pace in the second quarter, marking the first outright negative major datapoint for Canada this year.


As a result of this, British Columbia Premier David Eby called on Bank of Canada to pause rate hikes as it's "hurting" people.


In a written letter to governor Tiff Macklen, Eby said: “People in BC are already hurting. In your role as governor, I urge you to consider the full human impact of rate increases and not further increase rates at this time.”


Do you have a question about angel investing? Get in touch with Valhalla Private Capital via our contact page.

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