The Bank of Canada sees higher borrowing costs slowing the economy, but officials opted to keep the door open to further interest-rate hikes as they debated their most recent monetary policy decision.

Policymakers saw the threat of additional tightening as a way to push back against expectations that rates might be cut soon, according to a summary of the central bank’s deliberations for its Sept. 6 decision. They also emphasized their “ongoing concern” about the stickiness of core inflation.

Officials discussed whether their call to hold the overnight rate at five per cent “could be misinterpreted as a sign that policy tightening had ended and that lower interest rates would follow,” the Bank of Canada said.

The summary, released Wednesday, illustrates the tightrope policymakers are walking as they try to wind down their rate-hike campaigns without reigniting inflation. U.S. Federal Reserve officials are also dampening any expectations of significant rate cuts in the U.S. next year. They now expect it will be appropriate to reduce the federal funds rate to 5.1 per cent by the end of 2024, according to their median estimate, up from 4.6 per cent when projections were last updated in June.

The yield on Canada two-year notes rose as high as 4.967 per cent after the Fed outlook was released, the highest since July 2001. 


After considering whether to keep rates steady or hike, Governor Tiff Macklem and five other members of the governing council decided to hold: “Members agreed that data since their last decision had shown more clearly that demand was slowing, and excess demand was diminishing as monetary policy gained traction.”

The document confirms the Bank of Canada remains wary of overtightening, and is seeing more evidence they’ve done enough. “The full impact of more recent policy tightening had yet to be felt.”

Still, policymakers remain worried about inflation, saying a lack of progress on underlying price pressures remain a “significant concern.” 

Since the deliberations, August headline yearly inflation came in hotter than expected, and closely watched measures of core inflation accelerated. 

In a speech and news conference after the September decision, Macklem said it was “much too early” to be discussing rate cuts. 

When the central bank declared a conditional pause to their aggressive hiking cycle in January, markets quickly started to price in lower future rates, and Canada’s housing market staged a rebound.

Policymakers next set interest rates on Oct. 25. Traders in overnight swaps put the odds of a hike at that meeting at more than 50 per cent.