Bank of Canada expected to hold key interest rate at 5% amid ‘sluggish’ economy

The Canadian economy shrank in the second quarter. Economists anticipate that weakness will continue for the rest of the year and into 2024.

The Bank of Canada is widely expected to hold its key interest rate steady on Wednesday as the Canadian economy bends to higher interest rates and inflation resumes its downward trend.

The central bank held its key interest rate steady at five per cent last month but kept the door open to more rate hikes, citing concerns about the persistence of underlying price pressures.

“Economic data releases since the Bank of Canada opted to forego an interest rate hike in September have been mixed, but we expect that they on net have made a hike at next week’s decision unlikely,” RBC assistant chief economist Nathan Janzen and economist Claire Fan wrote in a client note on Friday.

The annual inflation rate rose in both July and August, while core measures of inflation — which strip out volatile prices — have not eased by much in recent months.

But the September consumer price index report helped quell some of those anxieties as the pace of price growth slowed across the economy and the annual inflation rate fell back to 3.8 per cent.

“We were kind of breathing a sigh of relief a little bit after the last inflation numbers,” said Andrew Grantham, CIBC executive director of economics.

“The recent inflation numbers suggest that it is starting to decelerate once again. And that, combined with the sluggish growth that we’ve seen, will probably keep (the Bank of Canada) on hold, not just this meeting, but really for the remainder of this year, and into next year as well.”

The Canadian economy shrank in the second quarter. Economists anticipate that weakness will continue for the rest of the year and into 2024.