The Bank of Canada held its policy interest rate steady at 5% yesterday, but don’t call it a pivot—they’re ready to hike again if that’s what it takes to whip inflation, and they want to make sure everyone knows it.
Driving the news: The BoC said, “evidence that excess demand in the economy is easing” justified holding interest rates steady, but emphasized that it was “prepared to increase the policy rate further if needed.”
Why it matters: That’s a departure from the Bank’s more dovish tone in January when governor Tiff “T-Mack” Macklem pledged a “conditional pause” on rate hikes.
That decision kicked off a rebound in the housing market that drove up prices by 5.6% over the first half of the year, according to the Canadian Real Estate Association.
- The Bank wants to avoid triggering another buying frenzy in real estate that would add upward pressure to inflation.
- But core measures of inflation remain stuck above the Bank’s target of 2% and the headline figure jumped to 3.3% in July, above June’s 2.8% rate of inflation.
Bottom line: Tiff likely hopes that if he can convince markets he’s willing to raise rates into the teeth of a recession, he can cool off borrowing and spending enough that he won’t actually have to. All’s fair in the fight against inflation, including psychological warfare.—TS