What You Need to Know About the BoC’s Rate Pause

The Bank of Canada continued to keep its finger off the interest rate trigger, but policymakers are keeping a hawk’s eye on inflation.

By Josh Sherman | 3 minute read

Eight times a year, the Bank of Canada provides a scheduled update on its key interest rate, which has serious implications for the Canadian housing market.

For the second straight time in recent months, the Bank of Canada has maintained the influential key interest rate at 5% as the Canadian economy continues to cool down, though policymakers aren’t ruling out future hikes just yet.

In a statement announcing the interest rate decision on Wednesday, the central bank suggested that its policymaking governing council still has lingering concerns about inflation. “Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed,” the statement reads. Since March of 2022, the Bank of Canada has hiked its key interest rate, which influences borrowing costs on everything from credit-card debt to mortgage payments, 10 times in an effort to quell surging post-pandemic inflation by reducing consumer spending. 

Inflation occurs when the prices of goods and services rise; higher interest rates discourage spending and borrowing thereby trimming demand for goods and services and moderating prices. The Bank of Canada aims to keep the rate of annual inflation at about 2%. In September, the Consumer Price Index (CPI), an inflationary measure of the costs of goods and services over time, was at 3.8%, down from 4% the previous month and the 8.1% peak in June 2022.

“Pause Patrol”: Canada’s Biggest Banks React 

Leading up to the Oct. 25 rate announcement, most market-watchers had predicted the Bank of Canada would once again remain on pause as it did on Sept. 6, following back-to-back 25-basis-point hikes in June and July. TD Senior Economist James Orlando was no exception. “The BoC didn’t throw any curveballs today. It acknowledged the growing evidence that economic momentum is slowing — falling retail sales, declining job vacancies, and a cooling housing market to name a few,” reads commentary by Orlando. “At the same time, the BoC didn’t declare victory,” he adds, noting the central bank’s language around being open to further hikes if needed.

Like Orlando, Derek Holt, vice president and head of Capital Markets Economics at Scotiabank, expected the continued pause — but he admits that the bank’s language foreshadowing possible future hikes caught him by surprise. “It was slightly more hawkish than I had expected going into it,” he writes. “I like the overall blend of communications that the BoC delivered here today,” he continues. “They struck a reasonable balance in their assessments while leaning cautiously against prematurely declaring victory over inflation while avoiding a promise to end rate hikes.”

In a separate report from RBC, one of Canada’s biggest banks suggests that higher interest rates are having the desired cooling effect on the economy, albeit more slowly than hoped. “With CPI readings still running well above the 2% target, the BoC is firmly focused on getting inflation under control,” reads the report. “Slower than expected progress is a concern. But evidence continues to build that interest rates are already restrictive enough to continue to cool the economy, and alleviate price pressures,” the report continues.

To BMO Chief Economist Douglas Porter, the BoC need not fiddle with interest rates any more than it already has. It’s just going to take more time for the effects of the new rate reality to work their way through the economy.  “We have long believed that 5% rates are plenty high enough to eventually quell underlying inflation, but it will take time and patience,” he writes in a report entitled “BoC: Pause Patrol.”

Meanwhile, CIBC Capital Markets Chief Economist Avery Shenfeld acknowledges how hard the previous rate hikes — which have left some homeowners struggling to cover their monthly mortgage payments — have been on Canadians and suggests the central bank’s hesitancy to opt for another one so quickly takes this into account. “The medicine we have to take to get inflation under control has some painful side effects, so it’s important to get the dosage right,” he writes in an Economic Flash report.

The BoC has eight scheduled rate announcements annually. The next and final one for the year is slated for Dec. 6.