Bank of Canada Holds Interest Rate at 5% as Economy and Corporate Earnings Slow

On September 6, the Bank of Canada announced it was holdings its key interest rate at 5%. In a prepared statement the country’s central bank said the cooling job market and slowing economic growth were two reasons why it opted to pause its benchmark lending rate.

The Bank of Canada said, however, that should inflationary pressure persist, it was prepared to increase interest rates further in order to achieve its 2% inflation target.

Canada’ inflation rate accelerated to 3.3% in July, after slowing to 2.8% in the previous month. While the inflation rate has fallen significantly from 9.1% in June 2022, it is widely expected to vacillate at around 3% for a number of months.

When Will The Bank of Canada Cut It’s Interest Rates?

The Bank of Canada will only start to cut its interest rates when the economy has cooled enough. There is no doubt that the Canadian economy has entered a period of weaker growth. Statistics Canada announced recently that real gross domestic product (GDP) unexpectedly contracted 0.2% in the second quarter. The unemployment rate has also been on the rise for the last three straight months.

As a result, the rate pause was expected. And a welcome relief to many Canadians. The Bank of Canada has raised its key lending rate 10 times since March 2022, taking it from near-zero to 5.0%, the highest level since 2001.

With the economy slowing, is an interest rate cut around the corner? With the chances of a recession still on the table and a loosening of labour market conditions, there is little need for the central bank to raise interest rates, in fact, some believe the central bank could announce a rate cut in early 2024.

How Are Interest Rates Impacting Stocks?

Rising interest rates make it more expensive to borrow, which in turn, is supposed to help cool economic growth and avoid a recession, or at least a hard landing. Moreover, it can take up to 12 months for the economy to feel the effects of any rate hikes or decreases. And after an unprecedented rate hike cycle, the effects are being felt on Bay Street.

A number of S&P/TSX listed companies are reporting the largest year-over-year decline in earnings since 2020. A full 93% of companies in the S&P/TSX Composite have reported results for the second quarter of 2023. The blended earnings, which combed the actual results of companies that have reported and estimated results for those still to report, is -19.1%, compared to -17.4% on June 30.

Should -19.1% be the actual earnings decline in the second quarter, it will represent the largest year-over-year decline in earnings since the third quarter of 2020. It will also mark the third consecutive quarter the index has reported a year-over-year decrease in earnings.

For the remainder of the year, analysts are forecasting a third quarter decline in earning of -10.7% but growth of 2.6% in the fourth quarter. For the full year, analysts are forecasting a decline in earnings of -10.0%.

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