The Bank of Canada left its key interest rate at 5%, but did not rule out the possibility of further rate hikes

The Bank of Canada kept its key interest rate steady at five per cent, but did not rule out future rate hikes as its latest forecasts show inflation will remain high in the short term.

“With clearer evidence that monetary policy is working, the collective view of the board of governors was that we have the option to wait and leave the policy rate at five percent. We will continue to do so and evaluate whether monetary policy is sufficiently restrictive to restore price stability. We will be closely monitoring the risks,” Bank of Canada Governor Tiff Macklem said at a news conference.

“If inflationary pressure continues, we are ready to further increase our key rate to restore price stability,” he warned.

Higher interest rates appear to be having the expected impact on the economy, with growth and consumer spending slowing and the labor market softening.

At the same time, inflation resumed its decline in September, falling to 3.80 percent as price pressures softens.

BMO chief economist Douglas Porter said that while he does not predict the central bank will have to raise interest rates again, it is too early to rule out that option.

“I think they are inclined to raise rates again if the need arises,” Porter said. “It probably won’t take much negative data to get them to raise rates.”

Economists had expected an aggressive tone from the Bank of Canada, given that underlying price pressures remain high.

The Bank of Canada also released its quarterly monetary policy report along with the rate announcement, which includes new economic forecasts that suggest slower economic growth and higher inflation in the near term.

Real GDP is projected to grow 1.2% in 2023, which is a downgrade from 1.8% in the previous forecast.

Meanwhile, growth is expected to slow in 2024 to 0.9% and recover to 2.5% in 2025.

The central bank still points that inflation will return to its target of 2% in 2025, as previously forecasted. However, he expects inflation to be higher in the short term, averaging around 3.5% by mid-2024.

Looking ahead, the monetary policy report outlined some risks associated with its forecasts, including war between Israel and Hamas. With oil prices now higher than previously expected, the central bank notes that an escalation of the war into a broader regional conflict could disrupt global oil supplies.

Macklem also pointed in on the impact of government spending on inflation, noting that the federal and provincial spendings will increase inflation next year.

“It would help if governments at all levels took the inflationary implications of their spending decisions into account when making plans. It will be easier to reduce inflation if monetary and fiscal policy move in the same direction,” Macklem said.

For owners of adjustable rate mortgages, who are already under pressure from the sharp rise in rates over the past year and a half, today’s decision by the bank came as good news. In any case, until the next announcement on December 6, their payments will not change. The Prime rate of commercial banks remained at 7.2%.