Bank of Canada holds key interest rate steady at 5% in final decision of 2023. Here’s what’s next

12:15 p.m.

What’s next?

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• Deputy Governor Toni Gravelle will deliver an Economic Progress Report on Thursday outlining the bank’s rationale for today’s decision. The speech in Windsor, Ont., starts at 12:50 p.m. ET, followed by a news conference at 2:10 p.m. ET.
• The Bank of Canada’s next interest rate announcement is on Jan. 24. It will also publish its quarterly Monetary Policy Report, with updated forecasts for inflation and economic growth.
• Statistics Canada will release November inflation data on Dec. 19 and October GDP numbers on Dec. 22.
• The U.S. Federal Reserve’s next rate announcement is on Dec. 13. Most economists expect the Fed to hold interest rates steady but will be watching for any changes of tone that hint at where U.S. monetary policy is headed.

– Mark Rendell

11:30 a.m.

Analysis: Takeaways from today’s Bank of Canada announcement

The thing that jumps out of the Bank of Canada’s stand-pat rate decision is that the central bank held the line on its nominally hawkish policy stand, too.

Specifically, the bank continues to outwardly worry about upside risks to inflation and say it is “prepared to raise the policy rate further if needed” – despite what is quite clearly a weakening of the economy since its previous rate decision in late October.

With the bank saying global growth and inflation have slowed further, that the Canadian economy has “stalled” (a pretty strong and adamant choice of word) and that the data “suggest the economy is no longer in excess demand,” the central bank would have absolutely been justified in backing off this stand. It chose not to.

One factor may have been the timing of this announcement. Historically, the bank has been hesitant to shift its policy just ahead of the holidays, preferring to hold the rudder steady before entering an extended period when a lot of financial market players, as well as central bankers, will be away from their desks. Should any unexpected shocks hit over the break, the bank will have avoided sticking its neck out.

Now we look for the bank to revisit this hawkish stand in late January, when the next rate decision will have the benefit of a new set of economic forecasts to back it up, in the quarterly Monetary Policy Report that will be released at the same time as that rate announcement. Assuming that the economy remains on its current course in the intervening seven weeks, without any major surprises, those numbers should support the case for the bank to tone down or remove the “prepared to raise policy rates further” language.

Still, the bank may choose to cling to that position a bit longer – as it might keep financial markets from jumping the gun in anticipating the start of rate cuts. (A move to more neutral language would be viewed as a necessary intermediate step before the bank starts to signal that it is beginning to consider cutting.)

As long as core inflation remains north of 3 per cent (it was about 3.5 per cent in November), and wage growth is stuck in the 4-per-cent to 5-per-cent range, the bank will have all the excuses it needs to continue emphasizing the upside risks to inflation. At the moment, at least, it looks like the bank needs more convincing from those key data before it shifts its message to neutral.

– David Parkinson

11:15 a.m.

What the BoC decision means for homeowners and mortgages

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The central bank’s continued pause in interest rates may provide relief for borrowers, but those who had hoped for a hint of a cascade of cuts in 2024 were left disappointed Wednesday.

Economists and the real estate industry expect the Bank of Canada to start lowering rates next year. But the central bank provided no guidance that cuts were in the works.

In its policy announcement, the bank repeated that it was prepared to raise interest rates “further if needed” and made no mention of lower interest costs.

That will give borrowers more time to adjust to today’s interest rate of 5 per cent. In particular, it will provide some relief for homeowners with variable-rate mortgages.

These borrowers have been paying more to service their loans ever since the central bank started raising interest rates in March, 2022. Many variable-rate borrowers have reached the point where their monthly payments no longer cover all the interest due.

They have seen their loans grow as the unpaid interest gets added to their principal, which is known as negative amortization.

But since the central bank has held rates steady, there are signs that borrowers are either adjusting by making higher monthly payments or are selling their properties and discharging their mortgages.

As of the end of October, three major Canadian lenders had a total of $110-billion of outstanding loans in negative amortization, according to their most recent financial statements.

That is down from $130-billion at the end of July – the last time the central bank hiked interest rates.

– Rachelle Younglai

10:55 a.m.

Economists react to the latest Bank of Canada decision

Here is how economists on Bay Street reacted to Wednesday’s hold:

Royce Mendes, head of macro strategy at Desjardins Securities: “In holding the policy rate steady at 5 per cent for the third consecutive time, Bank of Canada officials acknowledged that higher interest rates are ‘clearly’ restraining household spending and that the economy is no longer overheated. That said, policymakers reiterated that, if inflation doesn’t continue to move towards their 2-per-cent target, they are prepared to unleash more rate-hiking pain on the economy.”

Avery Shenfeld, chief economist at CIBC Capital Markets: “We weren’t expecting a definitive declaration of victory at this point, and without a new Monetary Policy Report and forecast due today, the bank was highly unlikely to drop its warning that a further rate hike could still be possible. But current trends are clearly leaning away from that, and the bank’s nod to broader progress against inflation and the fact that the economy is no longer clearly overheated suggest that the central bank isn’t at this point really giving much thought to additional tightening.”

James Orlando, senior economist at Toronto-Dominion Bank: “Markets don’t think the BoC will be able to get too comfortable. The next move is clearly a cut, with odds pointing to the first move in April. We agree. The next few months are going to be challenging given our expectation that the unemployment rate will continue to rise, which will hit consumer spending and bring inflation down along with it.”

– Matt Lundy

10:40 a.m.

How markets are reacting after today’s BoC decision

Bond yields traded lower ahead of the Bank of Canada announcement Wednesday, briefly climbed at 10 a.m., then settled lower. The two-year Government of Canada bond fell four basis points to 4.06 per cent before the news, rose for an instant to 4.08 per cent as the announcement hit, then dropped again to the 4.06 per cent level. Action for the five-year bond was similar. The yield fell from 3.47 per cent to 3.4 per cent before the announcement, bounced higher to 3.44 per cent just after 10 a.m. and is now trading at 3.41 per cent.

How markets, and rate cut bets, are reacting to the BoC policy decision

Bond traders were seemingly prepared for the less hawkish hold.

– Scott Barlow

10:30 a.m.

Analysis: Are we finally looking down from the peak of Mount Interest Rate?

We could very well be looking down from the peak of Mount Interest Rate. The Bank of Canada hasn’t ruled out further increases, but there’s a growing consensus that we will start seeing rate declines in the first half of next year.

Here’s a list of five things to do with your investments and personal finances to prepare for lower rates:

Buy bonds and bond funds: Falling rates push bond prices higher – it’s the opposite of the damage done to the bond market when rates surged in 2022 and earlier this year. If you invest in a bond or bond fund now, you put yourself in a position to get a nice interest rate plus capital gains on the rising value of your bond or bond fund. An aggregate bond exchange-traded fund is worth a thought – exposure to the entire bond market in a single, cheap-to-own fund.

Look at hard-hit dividend stocks: High rates make it less attractive to get your income from a dividend stock as opposed to a lower-risk bond or guaranteed investment certificate. This is a big reason why many widely held dividend stocks have been hammered in the past year or so. Lower rates aren’t a cure-all for these stocks, but they will help by lessening the competition from bonds and GICs.

Find the best parking spot for your cash: In a falling rate environment, which savings accounts will maintain high returns the longest? The answer could very well be the high-interest savings account ETF, where returns move in lockstep with the Bank of Canada’s overnight rate. HISA ETFs hold deposits at big banks and can be expected to offer an after-fee yield in the high 4-per-cent range right up until the first cut in the overnight rate. Rates on other savings products are less easy to predict.

Does the latest Bank of Canada announcement mean it’s go-time again for variable-rate mortgages?

Consider a variable-rate mortgage: You’ll find more detail on this in a column I have for today, but a variable-rate mortgage lets you benefit each time the Bank of Canada cuts rates in the months to come. Fixed-rate mortgages eliminate anxiety about unpredictable rates and inflation, but they lock you into what now appear to be peak borrowing costs.

Take a last look at GICs: Returns on guaranteed investment certificates have already started to edge lower, but rates of 5 per cent and more can still be had for terms of one through five years. There’s no particular significance to a 5-per-cent rate, but it does seem a worthwhile return on risk-free money. Two caveats on GICs: After-tax returns in non-registered accounts are treated like regular income, and they are exceptionally difficult to redeem before maturity. Cashable GICs are widely available but with a big return penalty.

– Rob Carrick

10 a.m.

Bank of Canada holds key interest rate steady at 5%

The Bank of Canada held interest rates steady for the third straight decision but warned that it is still prepared to hike again, opting for a hawkish message in the face of market speculation that interest rates have peaked and cuts are coming next year.

As widely expected, the central bank kept its policy rate at 5 per cent, where it has been since the last rate hike in July. The bank has pushed interest rates up aggressively over the past year and a half to combat the biggest surge of inflation in decades.

“Governing council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed,” the bank said in its one-page announcement, reiterating earlier warnings. At the same time, it said that high borrowing costs are working to curb spending and that there are signs the Canadian economy is “no longer in excess demand.”

Economists were watching the announcement for signs of a pivot from Governor Tiff Macklem and his team. The annual rate of inflation has fallen to near the upper end of the bank’s 1 per cent to 3 per cent control range, and economic growth in Canada has stalled in recent quarters. That’s led to market speculation that the bank is done tightening monetary policy and could start lowering rates by the middle of next year.

However, the bank gave few hints that it is preparing to cut rates any time soon. Everything it says moves bond markets, and policymakers may be wary of driving bond yields lower and prematurely loosening financial conditions. Yields on long-term bonds have already fallen sharply over the past month from their October peak, as investors have moved away from assuming that central banks will keep interest rates “higher for longer.” That has taken mortgage rates lower.

Read the full story on today’s BoC rate announcement.

– Mark Rendell

9:10 a.m.

How interest rate hikes have unfolded so far in 2023

– Mark Rendell

8:45 a.m.

Analysis: What to look for during today’s BoC rate announcement

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In what is almost certain to be a no-change interest rate announcement, the key will be whether the Bank of Canada tweaks the text of its statement to move its policy needle away from further rate hikes – or even toward future cuts.

While the bank will reveal its actual decision on the policy interest rate in the first sentence of the typically five- to six-paragraph release, the real meat of this announcement will be in the last paragraph. This is where the bank signals its current policy stance – whether it’s more inclined to raise or cut rates in future decisions, or is neutral.

The operative phrase in this regard in the bank’s October rate announcement was: “Governing Council … is prepared to raise the policy rate further if needed.” The bank has been applying some version of this phrase all year, when it wasn’t actually nudging its policy rate higher – thus keeping its position tilted toward further increases.

So, it would be a big deal if the bank decides to remove this de facto tightening bias. It could simply delete the phrase, or it could replace it with some new, more neutral language.

It’s far from a slam dunk. But the considerable economic weakness that the bank has seen over the past few months has absolutely reduced its concerns about lingering inflationary pressures that would demand further rate hikes.

This could be enough to justify a more neutral message, the first logical step toward repositioning the bank’s policy stance toward rate cuts, which most economists expect by the middle of next year.

– David Parkinson

8 a.m.

Market expectations ahead of today’s BoC decision

The Bank of Canada makes its rate decision later this morning, with the markets widely looking for the central bank to again hold steady. Traders will be looking for signals about future direction although markets aren’t expecting a significant dovish turn in the bank’s accompanying statement.

There is no media briefing planned after the announcement, although BoC deputy governor Toni Gravelle is scheduled to deliver the bank’s economic progress report during remarks in Windsor, Ont., on Thursday.

“It is too early for the BoC to lean too dovish at [Wednesday’s] meeting and say anything about rate cuts or their timing,” TD economist Marc Ercolao said in a recent report.

“The Bank will likely need to see inflation, especially core measures, move durably lower before they move off their bias towards rate hikes.”

He said markets have priced in the possibility of a first rate cut to take place around April, which is in line with TD forecasts.

“Rest assured, the BoC’s most aggressive rate hike campaign in over 40 years is working,” he said. “Consumers are reeling in their spending, labour markets are returning to balance, and growth is evolving in a manner consistent with inflation inching closer to the BoC’s 2-per-cent target.”

– Terry Weber

7 a.m.

Bank of Canada expected to end year with another interest-rate hold

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The Bank of Canada is expected to hold interest rates steady for the third announcement in a row, with analysts watching for any language changes that indicate the end of monetary policy tightening.

The statement-only rate decision will be published Wednesday at 10 a.m. ET. It will not be accompanied by a new forecast or a speech from central bank officials.

The bank’s governing council has kept the policy rate at 5 per cent – the highest level in 22 years – since July. Governor Tiff Macklem has warned that more rate hikes are possible if inflation proves stubborn, and said that it’s too early to talk about rate cuts. However, most economists think interest rates have peaked, and speculation on Bay Street has shifted to when the bank will start lowering rates.

At 3.1 per cent in October, the annual rate of inflation is now near the upper end of the central bank’s target band. Meanwhile, the Canadian economy is struggling to grow under the weight of high borrowing costs. In a speech last month, Mr. Macklem said that interest rates “may now be restrictive enough,” and that excess demand in the economy “is now gone.”

The big question on Wednesday is whether the bank will keep talking tough about inflation and threatening more rate hikes. What central bankers say influences bond markets and therefore borrowing costs. Even if the bank is approaching a pivot point, it may maintain a hawkish tone to prevent a loosening of financial conditions.

Most private-sector economists think the bank will start lowering interest rates in the second or third quarter of next year. Interest rate swap markets, which capture market expectations about monetary policy, are currently pricing in a more than 60-per-cent chance the bank starts cutting rates in March, according to Refinitiv data.

Read more about today’s Bank of Canada announcement.

– Mark Rendell