Bank of Canada holds rates at 5.00% as expected

<ul><li>Prior was 5.00%</li><li>The
Canadian economy has entered a period of weaker growth</li><li>The tightness in
the labour market has continued to ease gradually</li><li>Recent CPI data indicate that
inflationary pressures remain broad-based</li><li>With the recent increase in gasoline prices,
CPI inflation is expected to be higher in the near term before easing
again</li><li>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%</li><li>Governing Council remains concerned about the
persistence of underlying inflationary pressures, and is prepared to
increase the policy interest rate further if needed.</li><li>growth prospects in China have diminished</li><li>In
the United States, growth was stronger than expected</li></ul><p>The market was pricing in a 14% chance of a rate cut ahead of the decision. The statement is clear that hikes are still on the table and they will take their time in deciding. The October 25 meeting shows about a 30% chance of a hike.</p><p>There is no press conference after this announcement but BOC Governor Tiff Macklem will deliver a speech tomorrow.</p><p>Full text:</p><p>The Bank of Canada today held its target
for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit
rate at 5%. The Bank is also continuing its policy of quantitative
tightening.</p><p>Inflation in advanced economies has continued to come
down, but with measures of core inflation still elevated, major central
banks remain focused on restoring price stability. Global growth slowed
in the second quarter of 2023, largely reflecting a significant
deceleration in China. With ongoing weakness in the property sector
undermining confidence, growth prospects in China have diminished. In
the United States, growth was stronger than expected, led by robust
consumer spending. In Europe, strength in the service sector supported
growth, offsetting an ongoing contraction in manufacturing. Global bond
yields have risen, reflecting higher real interest rates, and
international oil prices are higher than was assumed in the July Monetary Policy Report (MPR).</p><p>The
Canadian economy has entered a period of weaker growth, which is needed
to relieve price pressures. Economic growth slowed sharply in the
second quarter of 2023, with output contracting by 0.2% at an annualized
rate. This reflected a marked weakening in consumption growth and a
decline in housing activity, as well as the impact of wildfires in many
regions of the country. Household credit growth slowed as the impact of
higher rates restrained spending among a wider range of borrowers. Final
domestic demand grew by 1% in the second quarter, supported by
government spending and a boost to business investment. The tightness in
the labour market has continued to ease gradually. However, wage growth
has remained around 4% to 5%.</p><p>Recent CPI data indicate that
inflationary pressures remain broad-based. After easing to 2.8% in June,
CPI inflation moved up to 3.3% in July, averaging close to 3% in line
with the Bank’s projection. With the recent increase in gasoline prices,
CPI inflation is expected to be higher in the near term before easing
again. Year-over-year and three-month measures of core inflation are now
both running at about 3.5%, indicating there has been little recent
downward momentum in underlying inflation. The longer high inflation
persists, the greater the risk that elevated inflation becomes
entrenched, making it more difficult to restore price stability.</p><p>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% 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. Governing Council
will continue to assess the dynamics of core inflation and the outlook
for CPI inflation. In particular, we will be evaluating whether the
evolution of excess demand, inflation expectations, wage growth and
corporate pricing behavior are consistent with achieving the 2%
inflation target. The Bank remains resolute in its commitment to
restoring price stability for Canadians. </p>

This article was written by Adam Button at www.forexlive.com.