The Bank of Canada did not want to give the impression that it was done raising interest rates — or that the cost of borrowing would soon drop — in communicating its most recent policy rate decision, documents released Wednesday show.
The Bank of Canada’s governing council worried that the decision to hold its benchmark interest rate steady on Sept. 6 could be “misinterpreted” as a sign that the central bank’s rate tightening cycle was finished, or that rates could even drop in the near-term, according to a copy of the deliberations from the policymakers’ meeting.
The Bank’s decision-makers opted to stress that the path for future rates was dependent on data and to “emphasize their readiness to raise interest rates further if needed.”
When the Bank of Canada held rates steady in January, it signalled a “conditional pause” in the tightening cycle. That relative calm for borrowers helped briefly bring Canada’s cooling housing market back to life in the spring and got financial markets speculating about when interest rate cuts could be coming.
The deliberations show ongoing concerns about “a lack of progress in core inflation” even as other aspects of the economy are showing signs of easing amid higher interest rates.
The decision to leave the Bank of Canada’s policy rate unchanged earlier this month was widely expected by economists, who viewed slowdowns in the economy and rises in the national unemployment rate as signs inflation would continue to cool despite some persistent price pressures.
But Wednesday’s deliberations show the Bank of Canada remains concerned about the pace of pay raises in the labour market, which have floated around four and five per cent annually in recent months.
“Members still view annual wage increases in the current range as inconsistent with achieving price stability without a large increase in productivity,” the deliberations read.
Tuesday’s consumer price index report from Statistics Canada meanwhile saw the headline inflation figure increase to four per cent in August from 3.3 per cent the month prior — a jump fuelled by higher gas and shelter costs.
The Bank of Canada’s preferred core inflation metrics also accelerated in the month. Deputy governor Sharon Kozicki said in a speech after the CPI data was released on Tuesday that still-hot underlying inflation is not consistent with returning inflation back to the central bank’s two per cent target.
Economists reacting to August’s inflation figures said the Bank of Canada is in a tough spot heading into its next rate decision on Oct. 25.
The Bank’s deliberations reiterated that policymakers will be watching the evolution of labour costs, excess demand, inflation expectations and corporate price-setting behaviours in deciding where to take rates next.
CIBC senior economist Andrew Grantham said in a note to clients on Wednesday that the minutes from the central bank’s latest meeting show the governing council “won’t necessarily react” to a short-term jump in inflation like the August data. Instead, he expects the Bank is looking for signs that it’s getting harder to bring inflation back down to two per cent over the long term.
Upcoming reports on the state of Canada’s labour market and the central bank’s own surveys on inflation expectations will therefore be “just as important” to the risk of future rate hikes as CPI reports are, he said.
But if those reports show more signs that Canada’s economy is continuing to run hot, BMO senior economist Robert Kavcic said in a note that the central bank won’t hesitate to move again.
“The bias remains to tighten further if wages and inflation don’t cooperate,” he wrote.
The U.S. Federal Reserve on Wednesday also opted to hold interest rates steady, but signalled that another rate hike might be needed this year to fully tame price pressures south of the border.
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