Bank of Canada holds interest rate steady at 5%

The Bank of Canada has decided to keep its benchmark interest rate steady at five per cent, the second straight time the central bank has done so and a sign it may be moving to the sidelines after raising the cost of borrowing 10 times since last year.

The move was widely expected by economists and investors who follow the central bank, after a slew of data points in recent months — from GDP, to jobs, to inflation itself — painted a picture of an economy that was slowing down.

Eight times a year, the central bank meets to decide on where to set its benchmark rate, known as the target for the overnight rate, which impacts the rates that retail banks pay for short-term loans.

All things being equal, the central bank raises its rate when it wants to slow down an overheated economy, and cuts it when it wants to stimulate borrowing, spending and investment.

After slashing its rate in the early days of the pandemic to keep the economy humming, in early 2022 the bank began to aggressively raise its rate in order to slay inflation, which had risen to its highest level in 40 years.

The bank taking the cost of borrowing from functionally zero per cent to five per cent in barely more than a year and a half slammed the brakes on spending and borrowing, wrestling the inflation rate from 8.1 per cent in the summer of 2022 to 3.8 per cent last month.

From the bank's perspective, inflation seems to be heading in the right direction, but in its statement announcing its decision, the bank makes it clear it doesn't think the inflationary dragon has been fully slayed just yet.

"In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures," the bank said. "Consumption has been subdued, with softer demand for housing, durable goods and many services."

The bank projects the economy to continue to cool enough to bring inflation back to its two per cent target some time in 2025, a forecast that would suggest the bank is happy to stand on the sidelines until that happens.

But it did leave the door open a crack to another rate hike, if necessary. "Governing Council is concerned that progress toward price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed."

In central bank-speak, that's the bank saying that it is willing to raise borrowing rates by even more if it has to, but investors are betting the threat is most likely an empty one.

Trading in investments known as swaps imply there's about a five per cent chance of a rate hike at the bank's next policy meeting in December. And pricing suggests that investors think the bank's rate will be lower next summer than it is today.

The Canadian dollar also sold off by about a quarter of a cent on the news. That's another sign that investors think further rate hikes are unlikely.

The bank will have more to say about its line of thinking at a press conference at 11 a.m. ET.