The Bank of Canada maintains its interest rate at 5%.

 Despite growing evidence that the economy is faltering, the bank would not rule out further increases.

The Bank of Canada decided to maintain its benchmark interest rate at 5% despite the economy starting to show indications of cooling off.

The unprecedentedly quick campaign of rate increases by the central bank since early 2022 has made significant progress in containing runaway inflation, thus the action was widely anticipated by economists and other market analysts.

There is a risk of overshooting and significantly slowing the economy after raising its lending rate from almost zero to five percent in just over a year and a half. This is because the effects of rate changes frequently take up to 18 months to become fully realized.

Numerous financial signs over the past few weeks point to the possibility of this.

In July, Canada's labor market lost nearly 6,000 jobs, and the unemployment rate increased slightly to 5.5%, according to figures on employment issued at the beginning of August. 

The Canadian economy shrank in the second quarter of 2023, according to figures on GDP released later in the month by Statistics Canada. The economy may be into at least a modest recession as a result of this first contraction since the pandemic's start.

Jim Thorne, a strategist with the Toronto-based investment company Wellington-Altus, claims that not only are there no longer any compelling reasons to trek, but it is also difficult to justify some of the hikes that have already taken place.

He predicts a rough crash for Canada's economy next year as the system struggles with too much expensive debt and consumers tapping out, as opposed to the moderate recession or so-called "soft landing" that analysts hope for.

While people like Thorne are concerned the bank has overshot on rate hikes, the bank itself makes it clear that it stands ready to raise them by even more should the situation require it.

In a statement accompanying its decision, the bank said it "remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed."

Royce Mendes, an economist with Desjardins, says it is noteworthy that policymakers at the central bank "aren't completely shutting the door to further rate increases."


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