December 21, 2023
Bank of Canada officials increasingly believe interest rates are high enough to tame inflation, but they’re still looking for further and sustained declines in underlying price pressures.
There’s a greater likelihood monetary policy is “sufficiently restrictive” to bring inflation back to the two per cent target, members of the central bank’s six-person governing council agreed when they made their most recent rate decision. A summary of those deliberations was released Wednesday.
Officials ultimately decided to hold the policy rate at five per cent for a third consecutive meeting on Dec. 6, opting to reiterate that the bank is still prepared to hike borrowing costs further if needed. “Risks to the inflation outlook remained, and it may still be necessary to increase the policy rate to secure further disinflation and restore price stability,” the bank said in its summary.
The communications point to broader agreement that policymakers see themselves at the end of their rate-hiking cycle, suggesting their debate will move to how long borrowing costs should remain at levels that restrict economic growth. In the last summary of deliberations, outlining the October decision to hold, members were split about whether rates would need to move higher. There appeared to be less of a divide in the December meeting.
Officials reiterated they’re closely watching the balance of supply and demand, wage growth, corporate price setting behaviour for how underlying price pressures evolve, but noted that members see those measures as rough guide posts and “not intermediate targets.”
Policymakers were also concerned about elevated shelter price inflation making it harder to return inflation to target, especially if borrowing costs came down too soon. “Members noted that if financial conditions eased prematurely, the housing market could rebound, further fuelling shelter price pressures.”
They agreed that monetary policy could not solve the “structural shortage of supply” in Canada’s housing market and said they would continue to monitor closely the contribution of shelter price inflation to core inflation and total CPI inflation.
Macklem told BNN Bloomberg Television he expects to start cutting interest rates “sometime in 2024” but needs to see several months of downward momentum in core inflation first. Economists and traders in overnight swaps see the central bank cutting by the middle of next year.
