By Steve Scherer and David Ljunggren
OTTAWA The Bank of Canada on Wednesday is expected to keep rates on hold at a 22-year high of 5% after the economy unexpectedly shrank in the second quarter, analysts said.
The central bank hiked rates by a quarter point in both June and July, and then said it was prepared to raise rates again to tame inflation that has remained above the bank's 2% target for 27 months.
While the economy turned negative in the second quarter, inflation has been stubborn, unexpectedly rising to 3.3% in July as core measures remained well above 3%.
"The Bank of Canada has the cover in the GDP data to stay on pause with a hawkish bias," Derek Holt, vice president of economics at Scotiabank, said in a note.
The decision will be announced at 10 am ET (1400 GMT). Governor Tiff Macklem will deliver a speech and hold a press conference on Thursday.
Canada's Liberal Prime Minister Justin Trudeau's support has sagged amid high inflation as his Conservative rival, Pierre Poilievre, hammered him for feeding inflation with government spending and driving up rates during a housing crisis.
The second-quarter 0.2% annualized gross domestic product decline was far lower than the Bank of Canada's (BoC's) forecast for 1.5% annualized GDP growth, a sign the economy could have already entered a recession.
"The path forward looks bleak," Tiago Figueiredo, an economist at Desjardins Group, said in a note.
Money markets sharply trimmed bets for an interest rate increase after the growth figures were published and now are pricing in a less than 7% chance for one, compared with 23% before.
Thirty-one of 34 economists polled by Reuters between Aug. 24-30 expect no change to the central bank's overnight rate at the meeting.
Inflation hit a four-decade high of 8.1% last year, and the BoC has hiked 10 times since March 2022 to try to get it back down to target.
But core inflation measures are inching down slowly, and a wealth of data is due out before the bank next meets to discuss rates in October.
"I'm unsure that rate hikes are done," Holt said. "Recent data affords the opportunity to buy some time."
(Reporting by Steve Scherer; Editing by Mark Porter)