The Bank of Canada held its benchmark interest rate at five per cent on Sept. 6, with one economist predicting the bank’s next move could be a cut based on deteriorating economic data, though policymakers warned they could hike again.

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'Next move a cut': What economists say about Bank of Canada's decision to hold rates Back to video

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The Bank of Canada in a statement said slowing economic growth and a cooling jobs market were among reasons it decided to keep its benchmark lending rate steady.

Gross domestic product unexpectedly contracted 0.2 per cent in the second quarter, something the central bank said “is needed to relieve price pressures.”

Nonetheless, the Bank of Canada expects challenges to remain in bringing inflation down to its two per cent target. Those challenges include rising gasoline prices and still elevated wage growth, which the central bank estimated at four to five per cent.

“Recent CPI data indicate that inflationary pressures remain broad-based,” the central bank said in its statement. “With the recent increase in gasoline prices, CPI inflation is expected to be higher in the near term before easing again.”

Inflation accelerated to 3.3 per cent in July after slowing to 2.8 per cent in June. Statistics Canada releases inflation numbers for August on Sept. 19.

Canada’s unemployment rate rose to 5.5 per cent in July. Meantime, jobs vacancies have continued to decline, according to Statistics Canada.

“The softness of recent growth and labour market data made it an easy call for the Bank of Canada to leave rates unchanged,” Andrew Grantham of CIBC Economics, said in a note.

Still, the central bank warned it would raise rates again “if underlying inflation pressures persisted.”

Core inflation hovering around 3.5 per cent explains some of the Bank of Canada’s “hawkish” tone, Stephen Brown of Capital Economics said.

Economists said the Bank of Canada may also be signalling another hike to avoid reigniting the housing market, a situation that arose earlier this year when a pause in rate increases led to higher home sales and prices.

“They clearly want the message to be heard loud and clear,” said Taylor Schleich and Warren Lovely of National Bank of Canada in their note. “In other words, despite the decision to hold, there was nothing dovish about this rate decision.”

Here’s what economists say about the rate decision and what the Bank of Canada might do next.

Stephen Brown, Capital Economics

“The Bank of Canada accompanied its decision to leave interest rates unchanged with a pledge to hike again if needed, but we doubt it will need to follow through. With recession risks rising and labour market conditions loosening, we continue to think that the bank’s next move will be a rate cut, in early 2024.

“With demand quickly shifting from excessive to deficient, and given our expectation that two CPI releases before the bank’s next meeting will show an easing of core inflation pressures, there will be little need for the bank to hike any further.”

Andrew Grantham, CIBC Economics

“Forecasts are uncertain, but economists know what’s already happened, so the softness of recent growth and labour market data made it an easy call for the Bank of Canada to leave rates unchanged today. The statement notes that ‘inflationary pressures remain broad based’ as the BoC rejects the idea of stripping out the mortgage interest component in assessing underlying inflation, and wage growth is still running in the four to five per cent range, lifting both costs and spending power.

“But an easing in demand and increased labour market slack are cited as evidence that the lagged impacts of monetary policy are kicking in, and the bank now needs to see if, given time, that brings both wage and price pressures to heel. To underscore its commitment to the two per cent inflation target, the bank warns that its prepared to hike again if needed, but our expectation is that increased labour market slack in upcoming months will mean that five per cent will in fact be the peak rate for this cycle. That said, we’re still a long way from a full all-clear statement from the BoC, let alone any mention of rate cuts.”

Charles St-Arnaud, Alberta Central

“The key message in today’s decision is that the BoC remains concerned that underlying inflationary pressures remain persistent. As such, the BoC points to solid wage growth and elevated momentum in measures of core inflation. The bank expects that continued slower growth will continue to ease price pressures.

“The BoC does not provide any forward guidance on whether further rate hikes could be necessary or whether it believes it will keep rates on hold for an extended period, suggesting that the BoC will be data-dependant. As such, the bank continues to make it clear that the outlook for the policy rate will depend on inflation.

“Nevertheless, it remains clear that if there were a tug-of-war between economic activity and fighting inflation, the BoC would choose the fight against inflation. With this in mind, while we believe that the BoC is likely on the sideline for the rest of the year, further rate increases this year cannot be fully ruled out — even if the probability is low in our view — if inflation was to prove more persistent than expected.”

Nathan Janzen, RBC Economics

“The BoC remains highly data-dependent and won’t hesitate to push interest rates higher if necessary to return inflation to the two per cent target rate. And there are two additional labour market reports and two additional inflation reports before the next scheduled decision in October. But we continue to expect that the recent soft-patch in economic data will continue, and look for the overnight rate to hold where it is through the end of this year.”

James Orlando, TD Economics

“No surprises today as the BoC held the policy rate at five per cent. With last week’s GDP release showing a contraction in the second quarter, and growing signs of a cooling in the job market, there was little pressure for the BoC to keep raising rates. Our expectation is that this period of “weak economic growth” is set to continue over the rest of this year and into early 2024.

“Although the BoC has moved back to the sidelines, it doesn’t mean it will let up on its hawkish rhetoric. It needs to make sure that financial conditions remain tight for the economy to continue to slow. Markets are still in the ‘will they, won’t they’ camp, with pricing for another hike around 50 per cnet. Given that the slowdown looks to continue, we think the bar for another hike has been raised.”

Douglas Porter, BMO Economics

“The Bank has certainly left the door ajar to the possibility of more hikes, but unless growth rebounds in Q3 — which we doubt — the BoC is likely done with rate hikes. The softer growth backdrop will bring inflation back to two per cent over time in our view and in the BoC’s models, even if the short-term CPI outlook is much more problematic. Holding rates steady at the next meeting will require some nerve as the next two CPI reports could see headline inflation approach four per cent, and will likely require still-chilly growth and some calming in core inflation.”

Taylor Schleich and Warren Lovely, National Bank of Canada

“So, what can we expect from the Governing Council in coming meetings? To be frank, there’s still plenty of uncertainty. Based solely on our macroeconomic outlook, we don’t think further rate increases are or will be warranted and recent activity/labour market data have offered some marginal confidence. That confidence might be further bolstered on Friday when the August LFS (labour force survey) is published and will likely show a further rise in the jobless rate.

“That said, we’ll concede that the very near-term inflation outlook isn’t very comforting, and the Bank is undoubtedly going to remain on the defensive. Indeed, rising gas prices and negative base effects put upward pressure on inflation in August and fresh data in two weeks is likely to show the CPI up nearly four percent year-on-year. Inflation this high may be tolerable for a month or two to the extent it’s driven by volatile factors out of the Bank’s control and comes alongside broader economic weakness.

“However, inflation pressures probably won’t go unaddressed should they persist or co-exist with an unexpected rebound in other key data points (i.e., GDP, jobs). Importantly, we’ll soon get an update on near-term inflation expectations and “corporate pricing behaviour” in October’s Business Outlook Survey. The Bank has keyed on these “soft” indicators in recent months. Given the weaker growth environment, we’d expect to see improvements here, but small sample size surveys can be difficult to forecast. To reiterate, additional hikes are not in our base case outlook but there is still a non-negligible chance of an October hike, as this fresh rate statement tries to make clear.”

Jay Zhao-Murray, currency analyst, Monex Canada

“One key change to the statement was the discussion around inflation, which now mentions that prices could briefly pick back up because of a rise in gasoline prices, although we don’t view this as particularly significant as the Bank almost always looks through energy shocks. We think the Bank retained such a hawkish bias for a few strategic reasons. The persistence in core inflation measures is a strong argument for preserving optionality, and sounding too dovish could lead to premature loosening of financial conditions as markets would price in cuts, which would make the final stretch of the inflation fight more challenging.

“But even then, we think the Bank sounds a bit too pessimistic on the underlying drivers of inflation, which in our view should lead to a near-term turnaround in core price pressures. The BoC has repeatedly mentioned that excess demand, inflation expectations, wage growth, and corporate pricing power will guide the path forward for policy. Well, excess demand has been eliminated, five-year inflation breakevens are well-anchored around two per cent, sequential momentum in wage growth has come to a screeching halt, and margins continued to compress throughout Q2. We therefore continue to expect no further hikes this year, but the risks to our call tilt to the upside and are concentrated around the October meeting.”

• Email: gmvsuhanic@postmedia.com