The Bank of Canada kept interest rates at 5% for the third meeting in a row. Many analysts consider this a hawkish hold as recent slowing growth data from Canada potentially opens the door for a more cautious approach to the upcoming path of interest rates.

A slowing economy

The Canadian economy recently entered a period of weaker growth, showing a sharp slowdown in the second quarter of 2023, as output fell by 0.2%, this was due to a reduction in consumption growth and a decline in the housing market.

Furthermore, the labour market has also continued to gradually ease, but wage growth is still a concern to the Bank of Canada remaining at 4 to 5%.

Inflation pressures remain

Core inflation is running at 3.5% year over year and CPI inflation rose to 3.3% in July up from 2.8% in June.

This prompted the Bank of Canada to note there has been little downward momentum in underlying inflation. The Governing Council also noted that the longer higher inflation remains, the greater the risk that inflation becomes rooted in the Canadian economy.

The Bank of Canada is prepared to do more

It was these inflation concerns that led the Bank of Canada to state it is prepared to increase interest rates further if needed. However, it does remain to be seen whether the governing council will need to hike rates further if the Canadian economy continues to slow. Unless inflation pressures continue to rise, the bank will be reluctant to hike rates again. This means we could have seen the last interest rate hike from the Bank of Canada.

What does this mean for the CAD?

The CAD has been rangebound at an index level for most of the summer, but the recent rise in oil prices could help lift the CAD in the near term. Canada is a large exporter of oil, so when oil prices rise it generally helps support the CAD. Look at the chart below to see the relationship between CAD and oil (oil is the blue line on the chart). See the interest rate meeting statement here.