Bank of Canada holds key interest rate at 5%, warns it could be hiked again 'if needed'

The Bank of Canada has held its key interest rate at five per cent.

It said there is growing evidence that its previous rate increases are “dampening economic activity and relieving price pressures.”

Business investment and demand for housing are falling amid higher borrowing costs, the central bank noted.

But because inflation remains high at 3.8 per cent – and “volatile” in the short-term – the bank said it remains “prepared to raise” the interest rate again “if needed.”

“The Bank [of Canada] remains resolute in its commitment to restoring price stability for Canadians,” it explained in a release this morning.

It said inflation is expected to return to the bank’s target of two per cent in 2025, but projected the CPI to average about 3.5 per cent through to the middle of 2024.

Economic growth, meanwhile, is forecast to be sluggish for years to come – 1.2 per cent in 2023, 0.9 per cent in 2024 and 2.5 per cent in 2025.

It comes amid a slowing of the global economy, the bank said, with China showing more weakness than expected.

The US, though, has performed better than anticipated, the bank explained.

“Inflation has been easing in most economies, as supply bottlenecks resolve and weaker demand relieves price pressures,” it explained.

“However, with underlying inflation persisting, central banks continue to be vigilant. Oil prices are higher than was assumed in July, and the war in Israel and Gaza is a new source of geopolitical uncertainty.”

It added: “In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures. Consumption has been subdued, with softer demand for housing, durable goods and many services.

“Weaker demand and higher borrowing costs are weighing on business investment.

“The surge in Canada’s population is easing labour market pressures in some sectors while adding to housing demand and consumption.

“In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease. However, the labour market remains on the tight side and wage pressures persist. Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance.”