The Bank of Canada’s six-member Governing Council believes the odds have increased that interest rates are now high enough to bring inflation back to target.
That’s according to a summary of the council’s deliberations from its December 6 monetary policy meeting.
“Members agreed that the likelihood that monetary policy was sufficiently restrictive to achieve the inflation target had increased,” the summary reads. But they also noted that upside inflation risks remain, and are therefore not prepared to rule out further hikes.
The members agreed that the Bank’s 475 basis points of rate hikes since March 2022 are continuing to work their way through the economy and are now slowing spending and easing price pressures.
“With the economy no longer in excess demand, members agreed they would be watching for signs that the slowdown in the economy was translating into further and sustained easing in inflation,” the summary said.
However, they cited ongoing concerns about the speed at which inflation was easing. Specifically, they pointed to the three-month annualized measure of core inflation, which has “remained stuck” at between 3.5% and 4% for nearly a year.
They also expressed concern that wages have continued to increase at between 4% and 5%. “If this were to continue, it would not be consistent with achieving price stability, particularly given weak productivity,” the summary reads.
As a result, members said they want to see more evidence that both of these indicators are trending “in a direction that is consistent with price stability.”
The council also discussed the current monetary policy’s impact on house prices.
Some members said they believed house prices would continue to ease as high interest rates continue to “weigh on the housing market.”
Others said they were concerned that prices could continue to rise due to the mismatch between housing supply and demand, and the time needed to bring new supply online.
“Members noted that if financial conditions eased prematurely, the housing market could rebound, further fuelling shelter price pressures,” the summary noted.
The members also “discussed at length” the acceleration of shelter price inflation, which in October rose at a pace of 6.1%, contributing a full 1.8 percentage points to the overall headline inflation reading of 3.1%.
The council acknowledged that higher mortgage rates are “clearly playing a role” in shelter price inflation, but also noted strong growth in rent and other components linked to housing, such as insurance, taxes and maintenance, which they said was “unusual.”
The Bank of Canada’s next policy meeting is scheduled for January 24, 2024.
