Bank of Canada felt uncertainty over rates did not mean inaction, minutes show

On November 10, Reuters reported that ahead of the Bank of Canada’s October 28 interest rate decision, the bank’s governors agreed that uncertainty over future rates did not mean the institution would remain idle. The Bank of Canada (BoC) increased its key interest rate by 25 basis points to 2.5% for the first time in over three years, attributing the decision to higher energy prices that could eventually impact non-energy costs.

During the rate-setting governing council meeting, members acknowledged the significant uncertainty surrounding the effects of rising energy prices and the ongoing trade war with the United States on inflation. Despite this uncertainty, the governors agreed that caution was necessary while evaluating the impact of economic developments on their outlook.

September saw Canada’s annual inflation rate rise to 3.2%, surpassing the bank’s 1%-3% target range, primarily driven by increased energy and transportation costs. Even though core inflation measures remained below the BoC’s 2% target, the minutes noted that building cost pressures would eventually influence consumer prices. Some economists and analysts claimed that the bank had raised rates too soon, a sentiment that intensified after a three-month decline in employment numbers.

However, the BoC remained concerned that prolonged high energy costs could eventually seep into the broader economy. The governing council concluded that even without a full transmission of energy shocks, the impact of energy alone would likely keep inflation around 3% for over a year. Businesses also faced higher costs from non-energy imports, which, the minutes emphasized, would eventually contribute to consumer prices.

The pandemic’s lingering effects heightened the importance of inflation expectations, as the participants observed that recent price changes were becoming more sensitive to public expectations. The deliberations revealed that near-term inflation expectations had risen, underscoring the need for a higher policy interest rate to curb the risk of energy costs spreading to other goods and services.