Bank of Canada holds interest rate steady at 5%

The Bank of Canada opted to hold its benchmark interest rate steady at five per cent as the economy is showing more and more signs of cooling.

The move was widely expected by economists and other financialobservers, as the central bank's unprecedentedly swift campaign of rate hikes since early 2022 have made major headway on bringing down runaway inflation.

Theimpact of rate moves can often take up to 18 months to be fully felt, so after taking its lending rate from functionally zero to fiveper cent in barely a year-and-a-half, there is a danger of overshooting and slowing the economy by too much.

A slew of financial indicators in recent weeks suggest that may be on the table.

Jobs data for July released at the start of August showed Canada's job market lost about 6,000 workers during the month, and the unemployment rate ticked up slightly to 5.5 per cent.

Later in the month, Statistics Canada released GDP data that showed Canada's economy contracted in the second quarter of 2023. That's the first shrinkage since the onset of the pandemic and a sign the economy may be tipping into at least a mild recession.

No reason for further hikes, strategist says

Jim Thorne,a strategist at Toronto based investment firm Wellington-Altus, says not only is there no good reason to hike any more, but it's actually hard to retroactively justify some of the hikes that have already happened.

"I'm in the camp that says they should have stopped at 2.5 per centand then let things settle out," he told CBC News in an interview.

"The Bank of Canada's mistake is that they're trying to find use monetary policy as a fine tuning instrument [but] it's a blunt instrument and they're going to go too far."

Instead of a mild recession or so-called "soft landing" that economists hope for, he's forecasting a hard landing for Canada's economy next year as the system dealswith too much expensive debt and consumers tapping out.

"The numbers just don't add up,so I don't know why Tiff Macklemis raising rates," he said, referring to the head of the central bank."No other central banker has ever raised rates when real gross domestic income is as negative as it is right now."

"People up here are whistling by the graveyard, thinking that this is not going to be very, very painful."

WATCH| Economistquestions rate hike rationale:

Economist questions rate hike rationale

1 year ago

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Armine Yalnizyan, the Atkinson Fellow on the Future of Workers, says the central bank's decision to raise interest rates again won't help fix the inflation problem, and could actually make things worse.

While people like Thorne are concerned the bank has overshot on rate hikes, the bank itself makes it clear that it stands ready to raise them by even more should the situation require it.

In a statement accompanying its decision, the banksaid it "remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed."

Royce Mendes, an economist with Desjardins, says it isnoteworthy that policymakers at the central bank "aren't completely shutting the door to further rate increases."

"It's no surprise that policymakers are hesitant to declare an end to the era of rate hikes, [because] apremature signal that rates have reached their peak would cause an unwanted easing in financial conditions," Mendes said.

Most economic indicators are tracking weaker than the bank was forecasting in its most recent outlook, Mendes added, so ultimately he thinks the bank is quite likely to be done with hikes whether they're willing to admit that or not.

"The recent string of weak data reinforces our call that the Bank of Canada will not be raising rates any further this cycle," Mendes said.

Home owner surprised by large hikes

If they are in fact done, it's not a moment too soon for homeowners likeShahan Ahmed and it may in fact be too late.

Ahmed owned and occupied ahome in Brampton when he decided, in 2021, to buy a second one to use as an investment property. He said he knew the rate on his variable rate mortgagewould go up, but not as quickly as it did.

"We thought it's going to go up by 25 basis points every time," he told CBC News in an interview, meaning that even with a half a dozen hikes from the Bank of Canada, or more, hisrate might have gone up by maybe two percentage points.

Instead, the bank hiked 10 times since early 2022, often in increments of 0.5, 0.75 and even a full percentage point at a time. That caused Ahmed's variable rate mortgage payment to almost double from $3,300 a month to $5,500.

He's now living in the investment property and renting out his original home, but his rental income doesn't cover his costs sohe's taken a second job and now works 15-hour days.

He says he's reluctant to sell one or both properties because that would simply lock in a paper loss of up to $300,000.

"Hopefully there is no rate hike because it is our breaking point," he said."We cannot take it anymore."