The Bank of Canada’s governing council raised interest rates again last month to “insure” against inflation getting stuck above 2 per cent, but they also announced a pause to further rate hikes after seeing enough “green shoots” to suggest price pressures are easing, according to a summary of rate decision deliberations, published for the first time on Wednesday.
The five-person governing council, led by central bank Governor Tiff Macklem, considered holding interest rates steady on Jan. 25. However, they opted for another quarter-point rate increase, bringing the bank’s benchmark lending rate to 4.5 per cent. This was in response to stronger-than-expected economic growth and labour market data.
At the same time, there was “broad agreement” on the council that it was time to announce a “conditional pause” to further interest-rate hikes – a move that made the Bank of Canada the first major central bank to signal the end of monetary policy tightening.
“All governing council members acknowledged they were approaching this decision with a similar view: that the bank’s monetary policy to date had been forceful and that the full impact would be felt in quarters to come,” the summary said.
Until Wednesday, the Bank of Canada stood apart from peer central banks in not publishing some form of rate-decision meeting minutes. In a paper published last month, the bank’s own staff ranked it last among nine peer central banks for the depth and breadth of information released after rate announcements.
The bank had long maintained that its consensus form of decision-making made meeting minutes unnecessary. Governing council members don’t formally vote on monetary policy decisions, rather they offer opinions to the governor who has final decision-making authority. That is in contrast to the U.S. Federal Reserve, where monetary policy is decided based on votes by members of the Federal Open Market Committee.
Ultimately, the Bank of Canada changed its mind after a review of its transparency practices by the International Monetary Fund last year. The summary published Wednesday is considerably less detailed than Fed meeting minutes.
The document mostly reiterated comments made by Mr. Macklem in recent speeches and news conferences. Although the revelation that the central bank considered standing pat last month “suggests a more dovish tilt among governing council members than was previously appreciated,” Royce Mendes, head of macro strategy at Desjardins Capital Markets, wrote in a note to clients.
The central bank has raised interest rates eight times since last March in an effort to bring the highest inflation since the 1980s under control.
The governing council believes this campaign is working, the meeting summary shows. The annual rate of Consumer Price Index inflation fell to 6.3 per cent in December from a peak of 8.1 per cent in June. More importantly, shorter three-month comparisons suggest the “momentum in inflation is turning a corner,” the summary said.
Still, Mr. Macklem and his team remain wary of large price increases for services as well as rapid wage growth, which can feed into inflation.
“While several factors were combining to bring overall inflation down, council discussed the risk of it becoming stuck materially above the 2-per-cent target. Persistence in supply chain challenges, services price inflation, wage growth and inflation expectations could all keep inflation above the target. A rebound in oil prices could also push inflation back up again,” the summary said.
The bank’s decision to publish the meeting summary is part of a broader push to increase transparency, and comes at a time when the bank is under intense scrutiny for its failure to control inflation, and its subsequent aggressive rate-hike campaign.
“It is a step forward,” said Stephen Gordon, an economics professor at Laval University. “But I would have liked to see a bit more of the back-and-forth, for-and-against, and maybe some sense of just how much division or uncertainty there was.”
The bank has made other changes in the past year in an effort to increase transparency and change up how it makes decisions. It has expanded its public outreach, notably on social media, and begun publishing its surveys of market participants.
It also turned one of its four deputy governor positions into a rotating role, where deputies will serve shorter two-year terms and work only part-time for the central bank. Nicolas Vincent, an economics professor at HEC Montréal, will start in this new role in March.
While the meeting summary does not contain a lot of new information, it does reinforce some of the bank’s recent messaging about inflation and interest rates. The governing council is willing to raise interest rates again if inflation proves stickier than expected, but this is not its base-case scenario, and it would require an “accumulation of evidence” to hike again.
“The minutes do suggest that a rate hike in March is exceedingly unlikely, and even if data remains strong we doubt that the bank would feel it has enough evidence to move rates in April either,” Andrew Kelvin, Toronto-Dominion Bank’s chief Canada strategist, wrote in a note to clients.
“June and July are the riskier meetings in our view. That said, we continue to look for the BoC to remain on hold until January, 2024, at which point we expect rate cuts.”