The policymakers of the Bank of Canada have stated that they are willing to raise their benchmark interest rate further, despite already reaching its highest level in 22 years. This decision was made earlier this month, when the policy rate was increased by 25 basis points to 5.0 percent. The central bank recently released the notes from the deliberations surrounding this interest rate decision.
In June, the Bank of Canada had already increased the policy rate by a quarter-percentage point. However, many economists felt that a single rate hike would not be enough to address the central bank’s concerns about potential inflation stagnation. Following the rate hike in July, there was a debate among observers and economists about whether it was necessary, as inflation had already fallen within the central bank’s target range of one to three percent.
The deliberations revealed that, in July, the central bank governing council believed that maintaining the policy rate at 4.75 percent would risk halting the progress made in controlling price increases. The annual inflation rate had dropped from 8.1 percent to 2.8 percent due to these efforts. However, policymakers noted that the underlying inflation pressures were more persistent than expected. More than half of the items in Canada’s consumer price index basket were experiencing price increases of over five percent annually.
The governing council also highlighted that the downward momentum in headline inflation was diminishing, and measures of core inflation were showing signs of holding steady at around 3.5 to 4.0 percent. They expressed concern that if the Bank of Canada did not continue to raise interest rates, inflation could rise again. However, they acknowledged the risk of raising rates too high, which could adversely affect Canadians.
In regards to future rate decisions and communication, policymakers decided to evaluate and adjust the key rate on a meeting-by-meeting basis. They agreed to raise the policy rate further if inflationary pressures persisted and progress towards the two percent target was stalled. However, they were cautious not to do more than necessary.
The Bank of Canada will announce its next interest rate decision on September 6. While BMO senior economist Robert Kavcic stated that the deliberations did not reveal anything new about the July 12 decision, they did highlight the dilemma faced by the central bank. There is uncertainty about whether policy is tight enough or if it needs to be tightened further. Although BMO does not anticipate any additional rate hikes this year, the risks lean towards further tightening if the economic forecast does not align with the Bank of Canada’s expectations.
In an updated outlook, the central bank projected that inflation would hover around three percent for the next year before gradually returning to the two percent target by mid-2025.
Overall, the Bank of Canada remains committed to managing inflation and making data-driven decisions regarding interest rates in order to maintain a stable and prosperous economy.
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