MNI:BOC Wanted To Avoid Hiking 'More Than They Had To'-Minutes

Bank of Canada officials wanted to balance fears they would overdo tightening against the risk of inflation getting stuck above target, according to minutes from the July 12 decision to hike the policy interest rate to 5%.

Even with clear evidence the economy and inflation were stronger than expected through Q1, it remained possible the drag of nine prior rate hikes was simply delayed, according to the seven-page document released Wednesday from Ottawa.

"Members noted that real interest rates had only recently entered clearly restrictive territory in the wake of a higher policy rate and declining inflation expectations," the minutes said. "This could explain why the impact of higher interest rates may appear to be delayed."

Governor Tiff Macklem and his deputies "agreed they were prepared to raise the policy rate further if inflationary pressures did not ease as projected and progress toward the 2% target stalled. But they did not want to do more than they had to," according to the Summary of Deliberations. Most economists see the Bank on hold at the next meeting in September, though some see another increase in October.

ALIVE TO INFLATION RISK

"With inflation projected to be above target for another year, they needed to be alive to the risk that near-term inflation expectations could remain high, making it harder to restore price stability," the report showed.

Macklem told reporters after the decision the idea of a pause was discussed but didn’t mention the potential for a 50bps move even as he warned he may need to hike again if upside inflation risks emerge. The Bank paused hikes early this year before returning in June and again earlier this month, with the 10^th hike taking borrowing costs to the highest since 2001.

Officials are also being tested by a housing market that rekindled after the rate pause and by signs that core inflation will be stubborn. The Bank has said inflation will hover around 3% over the next year and not reach the 2% target until mid-2025. (See: MNI INTERVIEW: Canada Seen Hiking At Least 50BP More-WLU Prof)

"Core measures of inflation had not slowed in recent months, with three-month rates persistently coming in around 3.5% to 4% since last September. Also, base-year effects are largely out of year-over-year CPI inflation. As a result, little near-term downward momentum in CPI inflation remains."