The bank’s decision leaves one thinking it had to restrain itself from another rate hike and may still do so in in its next rate decision in October
Maybe that’s because the central bank isn’t sold on it itself.held its policy rate steady at 5 per cent
This is not a statement from a central bank that is striding confidently into a new neutral phase of monetary policy. It feels more like the Bank of Canada had to seriously restrain itself from one more rate hike – and still has its finger hovering over the hiking button as it thinks about its next rate decision in late October.ended one of the most aggressive phases of policy tightening in history.
But some recent economic growth numbers suggest that the key source of this troublesome inflationary pressure – excess demand, especially from consumers – has sprung a big leak. The overall economy actually contracted by 0.2 per cent, annualized, in the second quarter. Retail sales, international trade, manufacturing – they’re all fizzling. The job market is slowing. Suddenly, it looks possible that the economy has already entered a recession.
That is a very big deal. The Bank of Canada estimates that the “neutral” real rate of interest – where rates neither stimulate nor restrict economic activity – is somewhere between zero and 1 per cent. That means the policy rate needs to be more than one percentage point higher than inflation to pose a meaningful drag on economic activity. Despite all of the Bank of Canada’s rate hikes over the past year and a half, the policy rate only became truly restrictive a few months ago.
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