The Bank of Canada (BoC) held rates on Wednesday, following two straight quarter-point rate hikes. This maintains the cost of borrowing at 5%, the highest level since 2002. The Canadian dollar weakened in the aftermath of the decision but recovered and ended the Wednesday session almost unchanged.
The hold in rate hikes was widely anticipated, as the money markets priced in a pause at a 94% probability ahead of the rate announcement. This indicates that the rate increase was not a surprise, but the Canadian dollar still lost some ground before recovering.
Bank of Canada Governor Tiff Macklem usually holds a press conference after the rate decision, but traders will have to wait until today for this, and the Canadian dollar could show some volatility after Macklem’s remarks.
Bank of Canada Statement
The BoC’s statement following the meeting noted that the economic growth had entered a phase of weaker growth but warned that it could raise interest rates again if inflation remained high.
Inflation Expected to Rise
Although the BoC held rates on Wednesday, it is still very concerned about inflation levels. The Consumer Price Index (CPI) climbed to 3.3% in July, up from 2.8% in June and the BoC said that it expected to inflation to rise again in the near term due to higher gasoline prices.
The BoC said that inflation remains broad-based and core CPI (the BoC’s preferred inflation indicator) is at 3.5% and “there has been little downward momentum in underlying inflation.” The statement warned that that the longer high inflation persists, the more difficult it becomes to restore price stability.
Is the BoC done with rate hikes?
The BoC’s statement stark view of inflation clearly leaves the door open to further rate increases, but with second quarter GDP missing expectations and contracting by 0.2%, the central bank could be done with rate hikes. The economy has cooled down as high interest rates continue to filter through the economy.
The BoC meets next in late October, and the rate decision will be largely based on GDP, inflation, and employment reports ahead of that meeting.
Canadian Stock Markets Decline, Canadian Dollar Weakens but Recovers
Following the BoC rate announcement, the Canadian benchmark stock market index, the S&P/TSX, posted slight declines while the Canadian dollar lost ground but recovered.
Ahead of the announcement, the S&P/TSX was down 106.78 points (0.52%) at 20,306. The S&P/TSX fell slightly after the announcement and closed on Wednesday down 186.80 points (0.92%) at 20,226.96.
The US Dollar against the Canadian Dollar traded at $1.3630 ahead of the BoC meeting and lost ground after the announcement, touching a high of $1.3677. The Canadian dollar recovered and closed on Wednesday at $1.3635, almost unchanged.
On Thursday, the Canadian Dollar has posted modest losses and is trading at $1.3649 in the European session. S&P/TSX 60 Futures are down 11.40 points (0.93%) at 1211.50.