While the Bank of Canada expects inflation to continue to ease this year, it is also concerned about the risk of inflation becoming “stuck materially” above its 2% target.
That concern was noted in the Bank’s recently released summary of the Governing Council’s deliberations prior to its March 8 rate decision. At that meeting—and again on April 12—the Bank decided to continue its rate-hike pause, leaving its overnight target rate at 4.50%.
In their deliberations, the members of the Governing Council said they were “comfortable” that inflation will continue to ease as monetary policy works its way through the economy this year.
“However, they remain concerned about the risk that inflation could get stuck materially above the 2% target,” the summary reads.
The Bank had previously addressed the challenge of returning to its 2% inflation target in its latest Monetary Policy Report released earlier this month. “Getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize,” the report reads.
In order to get to 2% inflation, Governing Council members agreed that short-term inflation expectations need to come down, along with measures of core inflation.
The stronger-than-expected 3.9% growth in the federal government’s fourth-quarter spending was also cited as a factor that will lead to increased domestic demand.
In its deliberations, the Governing Council members acknowledged the Bank has “put a great deal of tightening in place in a very short period and will need a further accumulation of data over time to see whether the expected impact on inflation and growth materializes along the lines of the January outlook.”
Repeating previous statements, members agreed that should there be an “accumulation of evidence” that inflation remains persistent, “the policy rate would need to rise further to keep inflation on a path back to 2%.”
Other topics discussed by the BoC’s Governing Council
The following are some additional highlights from the March 8 Governing Council deliberations.
GDP forecasts
Council members noted that, overall, there are clear signals that monetary policy is having the desired effect of slowing the economy. They pointed to flat GDP growth in the fourth quarter, which was weaker than the Bank had expected, “largely due to a sharp slowdown in inventory investment.”
As a result of inventories adjusting earlier than expected, they said growth in Q1 could be “a bit stronger” than the Bank’s earlier forecasts.
“Surprisingly strong” labour market
Council members remarked that the recent increases in employment are “surprisingly strong,” adding that the market remains “very tight” and is operating above maximum sustained levels.
Canada’s labour market has grown strongly over the past seven months, with a total of 382,000 new positions created over that time.
In assessing why tightness in the market hasn’t eased over the past six months, the council considered implications of increased population growth in 2022, how waves of COVID-19 may have affected seasonal employment data, and recent shifts in the mix of employment and average hours worked.
Resilience of the U.S. economy
Also discussed was the resilience of the U.S. economy and the persistence of elevated core inflation and whether that may foreshadow similar developments here in Canada.
“Tight labour markets in Canada could lead to more persistence in core inflation here, as they are doing in the United States,” the summary reads.
Council members discussed some key differences between the two countries, however, including a higher immigration rate in Canada, the fact consumption rebounded stronger in the U.S. and earlier compared to in Canada, and Canadians’ increased sensitivity to higher interest rates.
The Bank of Canada’s next policy decision will be delivered on June 7, 2023.
