Some policymakers at the Bank of Canada expressed concerns last month that interest rates weren’t high enough to fully tame inflation, according to newly released deliberations that took place ahead of the last rate decision.
The Bank of Canada opted to hold its benchmark interest rate steady at 5.0 per cent on Oct. 25, marking a second consecutive rate hold in what’s been an aggressive tightening cycle from the central bank.
The deliberations among the Bank of Canada’s governing council that led to that decision were released on Wednesday, offering further insight into what economic factors led monetary policymakers to leave rates unchanged.
Despite forgoing another rate hike, the governing council felt that inflationary risks had increased since its last decision in September, according to the deliberations, which members noted was a source of “considerable concern.”
The Bank of Canada raised its outlook for inflation in the near term last month, citing fears that stickiness in underlying inflation could persist as the labour market was still showing signs of tightness and corporate pricing had not yet normalized.
Governing council also pointed to new risks tied to higher oil prices, global instability and the possibility of future supply chain disruptions. The possibility that the conflict between Israel and Hamas pushes gas prices higher was cited as one such risk in the deliberations.
These factors were among those giving rise to concern within the council that the Bank of Canada’s policy rate is not yet high enough.
“Some members felt that it was more likely than not that the policy rate would need to increase further to return inflation to target,” the deliberations read.
Other members of the council were confident that the policy rate was sufficiently restrictive at five per cent to get inflation back down to the central bank’s two per cent target, “provided it was maintained at that level for long enough.”
At the same time as the Bank of Canada flagged rising inflationary risks, policymakers also felt that tighter monetary policy had “gained traction” in recent months amid signs of a slowing economy.
The council ultimately came to a “strong consensus” to hold rates steady and wait for more economic data before agreeing to “revisit the need for a higher policy rate at future decisions.”
Canada’s overall inflation rate fell to 3.8 per cent in September, but underlying price pressures have not eased by much in recent months.
Core measures of inflation, which strip out volatile price movements, have remained in the 3.5 to 4.0 per cent range over the last year, the central bank notes.
BMO senior economist Robert Kavcic said in a note to clients Wednesday afternoon that the October rate decision deliberations show the “dilemma” the Bank of Canada finds itself in.
Stuck between signs of a weakening economy and persistent inflation, policymakers warned in the deliberations that they might have to tighten monetary policy further to avoid inflation becoming entrenched.
“It’s a waiting game now, and it sounds like inflation will either break more convincingly, or the Bank will be willing go back to the rate-hike well,” Kavcic said.
The BMO forecast has inflation showing meaningful signs of easing before the Bank of Canada has to make its next decision on Dec. 6, allowing the central bank to leave rates on hold.
The Bank of Canada’s governing council attributed the persistence of high inflation to several factors, including rising shelter prices.
The central bank’s interest rate hikes are partly to blame for that, given they have fed into higher mortgage interest costs for Canadians.
However, the central bank has recently noted that other shelter costs remain elevated, largely due to imbalances in the housing market.
“Higher interest rates would normally exert downward pressure on house prices and other costs that are closely linked to house prices, such as maintenance, taxes and insurance,” the central bank said.
“However, the ongoing structural shortage of housing supply in the economy was sustaining elevated house prices. And the rapid increase in Canada’s population had added to the existing imbalance between demand and supply for housing.”
The deliberations also echo recent comments from Bank of Canada governor Tiff Macklem, who said on Oct. 25 that the current pace of government spending is “not helpful” for getting inflation under control.
The central bank’s analysis of federal and provincial budgets show that if current spending plans at all levels of government are realized, it would “contribute materially to growth” over the next year.
“By adding to demand at a faster pace than the growth of supply, government spending could get in the way of returning inflation to target,” the deliberations said.
One area of relief for Canadians as of late has been at the grocery store, with food inflation dropping from double-digit highs this time last year to 5.8 per cent in September.
The central bank’s deliberations showed policymakers expect inflation here to “moderate further as lower input costs are passed along to final food prices.”
— with files from The Canadian Press
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