Canada’s central bank on Wednesday held its key lending rate at five per cent, pointing to a weakening economy harmed by record wildfires over recent months.
“The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures,” the Bank of Canada said, adding however that inflation remains relatively high.
The bank hiked rates aggressively over the past year in a bid to bring inflation down to around two per cent, from a peak of 8.1 per cent in June 2022. In July, average consumer prices rose slightly to yield an inflation rate of 3.3 per cent after steadily trending downward.
The bank said its governing council “remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed.” It said inflation was expected to be higher in the near term before easing again, while also noting that “there has been little recent downward momentum in underlying inflation.” “It’s no surprise that policymakers are hesitant to declare an end to the era of rate hikes,” commented Desjardin analyst Royce Mendes in a research note.
A recent string of weak data, he said, reinforces a widespread view among economists that the bank will not raise rates further anytime soon.
RBC Economics’s Natahn Janzen agreed, saying he expects the “recent soft-patch in economic data will continue” and the bank to “hold where it is through the end of this year.” - Pleas for lower rates - The Bank of Canada noted in its report that economic growth slowed sharply in the second quarter, with output contracting at an annualized rate of 0.2 per cent.
“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,” it said.
The labour market has continued to gradually ease, it added, but wage growth has remained at around four to five per cent.
The ruling Liberals have faced a barrage of criticisms from opposition parties over soaring costs of living, compounded by rising rates, and now trail the Conservatives in public opinion polls.
Jagmeet Singh, the leader of a small leftist faction propping up the minority government, called for the Liberals to review the bank’s inflation-busting mandate to also include consideration of the impacts of rate hikes on Canadians’ pocketbooks.
“High interest rates hurt Canadians,” Singh said at a caucus meeting ahead of the return of Parliament after a summer break. “It’s time to say enough is enough.” Provincial leaders of British Columbia and Ontario in the past week also pleaded with the bank not to raise rates further, saying it would cause hardship for homeowners set to renew mortgages at higher rates and those struggling to buy in a tight housing market.
Finance Minister Chrystia Freeland said in a statement the bank’s decision not to hike rates on Wednesday was “welcome relief for Canadians.” She did not comment on the bank’s mandate, but vowed to “use all the tools at my disposal, and to work with partners at other levels of government across Canada, to ensure that interest rates can come down as soon as possible.”
Separately, Canada recorded a smaller-than-expected trade deficit in July, as a West Coast dock workers’ strike weighed more heavily on imports than on exports, Statistics Canada data showed on Wednesday.
Canada’s trade deficit with the world came in at C$987 million ($722.97 million), lower than the C$3.65 billion shortfall analysts had forecast in a Reuters poll. June’s deficit was revised to C$4.92 billion - the third largest on record - from a C$3.73 billion deficit initially reported.
Total exports rose 0.7% while imports decreased 5.4% in July.
Both were impacted by a 13-day dock workers’ strike in British Columbia that disrupted operations at two of Canada’s three busiest ports, Statscan said, adding that trade may also be affected in the coming months as freight backlogs continue to be cleared.
“This was pretty positive, surprisingly good data when you consider what we were dealing with in terms of the impact of the British Columbia port strikes in July,” said Stuart Bergman, chief economist at Export Development Canada, the country’s export credit agency.
Slowing trade was among factors in an unexpected economic contraction in the second quarter and Bergman said Wednesday’s trade report signals a good start to the third quarter on the export side of things.
The Bank of Canada on Wednesday held its key overnight interest rate at 5%, noting that the economy had entered a period of weaker growth, but said it could raise borrowing costs again should inflationary pressures persist.
The rise in exports was largely due to higher exports of canola, aircraft and other transportation equipment and parts offsetting the impact of the strike, Statscan said. By volume, exports fell 0.2%.