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The Bank of Canada held interest rates steady for a third straight decision Wednesday but warned that it is still prepared to hike again, as it continues to talk tough about inflation in the face of market speculation that 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.

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At the same time, it said high borrowing costs are working to curb spending and that there are signs the Canadian economy is “no longer in excess demand.” And it dropped a line from its previous rate announcement, in October, that said “inflationary risks have increased.”

Economists were watching Wednesday’s announcement for signs of a pivot from Governor Tiff Macklem and his team. The annual rate of inflation has fallen since mid-2022 and is now 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 has 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 policy makers 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.

“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,” Canadian Imperial Bank of Commerce chief economist Avery Shenfeld wrote in a note to clients.

“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.”

Two-year Government of Canada bond yields ended the trading day near where they started, at 4.07 per cent, while five-year yields edged lower to about 3.40 per cent. The five-year yield has fallen a full percentage point since early October.

Interest-rate swap markets, which capture market expectations about monetary policy, are putting the odds of a rate cut in March at almost 60 per cent, according to Refinitiv data. Swap markets are also pricing in two rate cuts by June.

The purpose of high interest rates is to cool spending and investment to reduce upward pressure on prices for goods and services. After 10 rate increases since March, 2022, tight monetary policy appears to be working, with high borrowing costs “clearly restraining spending,” the central bank said.

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“Consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year.”

The labour market is also easing. The unemployment rate has moved up to 5.8 per cent from 5 per cent at the start of the year, and the number of job vacancies has plummeted. But wage growth, which is running at an annual rate of 4 per cent to 5 per cent, remains higher than the bank would like to see.

So far, the Canadian economy has avoided a recession, and the central bank is forecasting low but still positive growth for the next several quarters. However, Mr. Macklem has warned in recent months that the path to a “soft landing,” where inflation falls back to the bank’s target without a significant downturn, has become narrower.

Economic weakness is feeding through to inflation. The annual rate of Consumer Price Index growth was 3.1 per cent in October, down from a peak of 8.1 per cent in the summer of 2022. The bank’s target is 2-per-cent CPI inflation.

While overall price pressures are easing, there are still pockets of high inflation. Housing costs, in particular, continue to surge. Rent was up 8.2 per cent in October from a year before. Mortgage interest costs, which are directly tied to Bank of Canada policy decisions, were up 30.5 per cent year-on-year.

So far, about 40 per cent of Canadian homeowners with mortgages have seen their monthly payments reset higher, Bank of Canada senior deputy governor Carolyn Rogers said in early November. Most remaining homeowners will see their rates reset by the end of 2026, with some heavily indebted borrowers facing “significantly higher payments.”

Housing affordability metrics have deteriorated as mortgage costs have risen without much of an offsetting decline in home prices. That has brought housing to the forefront of Canadian political debate.

Toronto-Dominion Bank economist Rishi Sondhi said he expects average home prices in Canada to decline about 10 per cent between the third quarter of 2023 and the end of the first quarter of 2024. Since the central bank’s summer interest rate hikes, home sales have slowed significantly while the number of new listings has climbed. Higher mortgage rates, along with uncertainty over the path of interest rates, have deterred potential buyers even though there is much less competition.

Home prices could start to rise again next year in the second or third quarter if the Bank of Canada says interest rates have peaked, then actually starts lowering them, Mr. Sondhi said in an interview. “We saw over the spring months that the market was highly reactive when the Bank of Canada signalled that they were on pause.”

How rate cuts would affect affordability depends on where someone is in the housing market: whether they are a homeowner, a renter or someone trying to buy a home.

“Yields are going to be falling, and that will help affordability, but that will be offset by rising prices, particularly starting in the second quarter of next year. So we don’t anticipate much in the way of affordability improvement through next year,” Mr. Sondhi said.

Looking forward, the Bank of Canada said it wants to see further easing in core inflation, which strips out volatile price movements. And it “continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”

Because interest-rate changes work with a considerable lag, Mr. Macklem has said in recent months that the bank could begin lowering rates before inflation gets all the way back to 2 per cent. Its latest forecast from October shows inflation averaging around 3.5 per cent until the middle of 2024, before declining to 2 per cent by mid-2025.

Deputy governor Toni Gravelle will deliver a speech in Windsor, Ont., on Thursday explaining the rationale behind the bank’s decision to stand pat on rates for now.

With files from Rachelle Younglai