The Bank of Canada is holding its benchmark lending rate at five per cent, but warned that it was prepared to hike  rates again if necessary, adding a hawkish overtone — tinted with a “dovish undertone” — to its third consecutive hold.

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“(The bank) wasn’t yet willing to drop its warning that it could raise rates again if needed, which would definitively mark a turning point,” said Avery Shenfeld, chief economist with Canadian Imperial Bank of Commerce, in note on the decision.

The central bank, nevertheless, acknowledged that it has notched some wins from its unprecedented rate hiking cycle, which has now plateaued at five per cent after rising from 0.25 per cent in March 2022.

Inflation is cooling for a growing range of goods and services, the bank said, adding that economy “is no longer in excess demand” — a shift from the previous statement at the end of October, in which it indicated the economy was “approaching balance,” Shenfeld said.

The bank also noted that the employment picture is loosening with job creation no longer able to keep pace with the increasing population, leading to a rising unemployment rate. Job vacancies have fallen close to where they were prior to the pandemic.

There remain areas of concern, the bank said including sticky core inflation of approximately 3.5 to four per cent — above the bank’s target of two per cent — and wage growth in the range of four to five per cent.

“Given today’s report that productivity fell for a sixth consecutive quarter in Q3, such wage growth is now generating unit labour cost increases of six per cent year over year, far too much cost pressure for comfort,” said Douglas Porter, chief economist at Bank of Montreal.

The central bank also cited “corporate pricing behaviour” and rising rents as ongoing risks to the inflation picture.

“A hold today was the only option for the BoC. Given the economic backdrop, the BoC has likely gained greater confidence that its policy stance is sufficiently restrictive,” said James Orlando, an economist with Toronto-Dominion Bank.

The next Bank of Canada rate decision is Jan. 24, 2024.

Here’s what economists are saying about the decision and where they expect the Bank of Canada to go from here.

Charles St-Arnaud, Alberta Central

“The key message in today’s decision is that the BoC sees clear signs that higher interest rates are moderating spending and reducing price pressures. However, progress toward bringing inflation to target remains slow. As such, the BoC continues to point to solid wage growth, inflation expectations, corporate pricing behaviours and elevated momentum in measures of core inflation as reasons that could lead to an increase in the policy rate, if necessary.

“Overall, in our view, the tone of the communiqué suggests that the BoC believes it is done tightening monetary policy but is not yet ready to declare victory in its fight against inflation.”

Douglas Porter, Bank of Montreal

“Given the bank’s goal of restoring its inflation-fighting credibility among the broader public, the BoC could very well wait as long as possible before shifting to a dovish bias and then to cuts. Assuming the economy doesn’t weaken materially further in the next few months, the policy rate trajectory is entirely dependent on the evolution of inflation. We suspect that while the underlying trend in inflation will improve in 2024, there will be bumps along the way, keeping the bank on hold a bit longer than the market currently anticipates. But it is safe to say that the countdown clock to rate cuts has begun, even if the bank isn’t saying so.”

Avery Shenfeld, CIBC Economics

“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. That’s not going to move markets which had already reached the same conclusion.”

Stephen Brown, Capital Economics

“The policy statement from the Bank of Canada was a bit more hawkish than we expected, with the bank reiterating that it is still concerned about the outlook for inflation and ‘remains prepared to raise the policy rate further if needed.’ Nonetheless, if the economy continues to weaken as we expect, then it won’t be long until the bank pivots to interest rate cuts.

“Against the backdrop of the weakening economy and falling inflation, the bank needs to start cutting the policy rate soon to prevent the real stance of policy becoming even more restrictive. We agree with market pricing that the first cut could come as soon as March.”

Claire Fan, RBC Economics

“The option for more tightening was again retained. But the dovish undertone with the rest of the statement suggests that option is not expected to be exercised.

“Overall inflationary risks have continued to recede in Canada after dominating the economic landscape for the past two years, and are gradually becoming more equally weighted with downside growth risks.  Still, the BoC will be cautioning against pivoting to rate cuts too quickly. Our own forecast is that the BoC will remain on hold until the second half of next year before cutting the overnight rate. Risks are that the move comes earlier if the economic slowdown were to become faster and/or steeper than expected.”

James Orlando, TD Economics

“With inflation still above three per cent, we get why the BoC isn’t ready to declare victory. Instead, the BoC seems like it is preparing to sit on the sidelines for the next couple of months while maintaining its cautious rhetoric.

“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. No wonder the Canada two- and 10-year yields have fallen approximately 90 basis points over the last two months.”

Simon Harvey, currency analyst, Monex Europe and Canada

“With the next few rounds of data set to display a more uniform message of economic weakness and the BoC’s next decision accompanied by a fresh set of economic projections, we expect the bank will need to officially open the debate to policy easing in January, before cutting rates in April. However, with slack rebuilding in the labour market at an aggressive pace and this likely to flow through to weaker measures of wage growth, there is a material risk that the Canadian economy will enter 2024 in an outright recession.”

Bryan Yu, Central 1

“There were some early holiday cheers for indebted households today as the Bank of Canada gave as clear a signal as likely possible, without a definitive statement, that its policy interest rate has peaked.

“The bank’s latest statement further solidifies our view that the next rate move will be a reduction, which may come as early as April as the economy remains subdued due to monetary policy impacts on consumers and mortgage renewals and rising unemployment rates.”

• Email: gmvsuhanic@postmedia.com

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