Bank of Canada holds, acknowledges easing in "excess demand"

As was almost-universally expected, the Bank of Canada maintained its benchmark overnight rate at 5 percent this morning, even as it retained a steadfastly-hawkish bias. Officials said “excess demand in the economy is easing,” and pointed to the “lagged effects of monetary policy” in supporting the decision to stay on hold for now. 

Policymakers acknowledged signs of underlying softness, noting that the “Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures”. Both transitory and structural changes are seen playing a role, with wildfires temporarily hitting activity even as consumption, housing, and credit growth slow on a more sustained basis. 

Price growth concerns remained front and centre, with pressures remaining “broad-based,“ and target measures exhibiting “little recent downward momentum in underlying inflation” - but officials think an easing will arrive after a short-lived gasoline-boosted jump in coming months. 

The Canadian dollar is almost unchanged as we go to print, with odds on an autumn rate increase holding stable relative to levels that held a few minutes ago. 

Markets will get more to chew on tomorrow, when Governor Tiff Macklem delivers the Bank’s latest Economic Progress Report in Calgary, providing more insight into the thinking behind today’s decision. We think he will stick to the “higher for longer” mantra, seeking to prevent early-2024 rate cut expectations from becoming too embedded. 

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