The Bank of Canada once again held its key interest rate steady at five per cent Wednesday, encouraged by evidence that higher rates are helping bring inflation down.
“Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year,” the central bank said in a news release detailing its final decision of the year.
The combination of weaker growth and a cooling job market suggests demand is no longer outpacing supply in the economy, the central bank added.
This slowdown, the Bank of Canada has argued, is necessary to restore price stability.
Wednesday’s decision marks the third consecutive time the Bank of Canada has opted to keep its key rate unchanged as forecasters widely expect the Bank of Canada’s next move will be a rate cut.
However, the Bank of Canada is not ruling out future rate hikes just yet.
“Governing council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed,” the central bank said.
Weighed down by higher borrowing costs, the Canadian economy has struggled to consistently grow this year. The most recent GDP report showed the economy contracted by 1.1 per cent on an annualized basis in the third quarter.
Meanwhile, inflation has eased considerably over the last year, reaching 3.1 per cent in October.
The Bank of Canada projected in October that inflation will fall back to the two per cent target in 2025.
Its next rate decision, along with updated economic forecasts, is set for Jan. 24.
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This report by The Canadian Press was first published Dec. 6, 2023.