The Bank of Canada (BoC) has decided to keep its key interest rate steady at 5%, despite signs of a weakening economy, according to a summary of the governing council's discussions released on Wednesday. The decision was made earlier this month, emphasizing the bank's commitment to monitor incoming economic data and assess whether rates need to rise further.
The central bank also expressed concern over the potential misinterpretation of their decision, fearing it could be seen as an indication that policy tightening had ended and lower interest rates were imminent. "They agreed that they did not want to raise expectations of a near-term reduction in interest rates,” the summary noted.
Earlier this year, BoC paused rate hikes to evaluate the impact of prior increases on the economy. This move shifted the conversation in financial markets towards the possibility of future rate cuts.
However, the governing council also acknowledged that maintaining current rates might not be restrictive enough to control inflation. They recognized the risk of inflationary psychology becoming entrenched in Canada if they delayed action. "This would mean they would need to tighten policy even further in the future," the summary said.
The BoC is closely monitoring inflation, which has not been decreasing as quickly as expected. Core measures of inflation, which exclude items with frequent price swings, have remained relatively stable. The bank's preferred core measures of inflation accelerated last month, according to the latest consumer price index report. The annual inflation rate also increased for two consecutive months, reaching 4.0% in August.
The governing council is observing other economic indicators as well, noting clearer signs that consumer demand is slowing and the economy is weakening. The council considered being patient and waiting for more data to determine whether rates are high enough to curb inflation but weighed this against the costs of acting too late.
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