MNI: BOC Mulled Hike, Feared Market Would Bet Rate Had Peaked
Minutes from Sept 6 decision show officials thought their decision to hold could raise bets on a near-term rate cut.
Bank of Canada officials considered raising interest rates earlier this month and feared investors would take their decision to pause as a sign the tightening cycle was over and that lower borrowing costs were coming.
Governor Tiff Macklem and deputies "considered the possibility that their decision could be misinterpreted as a sign that policy tightening had ended and that lower interest rates would follow," according to meeting minutes published Wednesday, two weeks after the decision to hold the key rate at 5%, the highest since 2001.
"They agreed that they did not want to raise expectations of a near-term reduction in interest rates, given that they only considered keeping the policy rate where it is or raising it further."
Most investors and economists following the decision indeed bet the central bank was done after 10 hikes, though few analysts see a cut until around the middle of next year. The Bank early this year signaled it could be done tightening only to return with increases in June and July amid stubborn inflation.
SIGNS OF ECONOMIC SLOWDOWN
Bets on a rate hike climbed Tuesday after a report showed inflation quickening to 4%, double the Bank's target, and core inflation measures also picking up.
Governor Macklem said in response to question from MNI after the decision that the minutes would shed light on a potential case for a hike but the seven-page document didn't provide many other details of how strong that discussion was.
Much of the report went through details covered in the rate decision, saying officials were convinced there was growing evidence an economic slowdown and tighter policy were pulling down inflation. Officials were also counting on the lagged effect of past hikes.
There was "significant time" considering slower consumer spending and questions around whether wage gains would slow amid weak productivity, the minutes showed. Tight job markets were weakening, and "members noted that employment growth had fallen below the rate implied by population growth in recent months."
CONCERN ABOUT STICKY INFLATION
Price gains remained too high and broad-based but as past jumps in commodity prices fall out of the 12-month inflation rate the balance of supply and demand will become more important in determining the trend, the report said.
"Governing Council agreed that the lack of progress in underlying inflation remained a significant concern," the minutes said.
Macklem has said several times in recent months that it is far too soon to think about rate cuts. The Bank has surprised investors several times with rate decisions during the Covid rebound, and likewise investors have often under-estimated the strength of Canada's economy in predicting a policy pivot.
"Members noted that they could choose to be patient, receive more data and see whether the evidence showed that interest rates were high enough to return inflation to target. However, they recognized that policy might not yet be restrictive enough and that, by waiting to act, they ran the risk of having inflationary psychology become entrenched in Canada. This would mean they would need to tighten policy even further in the future."
The Bank began publishing minutes this year following an IMF recommendation, and doesn't provide vote tallies in a system where only the governor is legally responsible for policy. Officials often say they make decisions by consensus.