As widely expected, the Bank of Canada (BoC) held the overnight rate at 5% today as it continues to focus on inflation pressures. Although inflation has come down from its high of over 7%, core inflation remains elevated at approximately 3.7% (as of July 2023).

Major global central banks, including the BoC, remain focused on restoring price stability. The BoC confirms “global growth slowed in the second quarter of 2023 and the Canadian economy has entered a period of weaker growth.” Weaker growth is needed to help ease price pressures and help inflation reach the target rate of 2%.

CIBC Capital Markets agrees it was an easy call for the BoC to leave rates unchanged today because of data supporting recent slower growth and a slower labour market. An ease in demand and an increase in labour market slack are evidence that Canadians are starting to see the lagged impacts of monetary policy tightening. The BoC now needs to wait and see if its current policy helps lower both wage and price pressures. CIBC Capital Markets expects the current overnight rate of 5% will be the peak for this cycle, but believes Canada is still a long way away from rate cuts.

Sandor Polgar, Portfolio Manager, Global Fixed Income at CIBC Asset Management confirms “the market reaction to the BoC rate announcement thus far has been muted as this outcome was largely expected.” Mr. Polgar is of the opinion today’s rate hold increases the probability of a harder downturn in Canada and Canadians should expect rates to remain higher for longer. He explains the BoC is not shying away from the idea of more rate increases in the future, “the hawkish interpretation centers on inflation concerns and outweighs the recent slowdown in growth. Near-term acceleration in inflation from energy prices and ongoing sticky core CPI will keep the BoC prepared to hike rates again this year if need be.”