MNI: BOC Worried About Sticky Prices Before Rate Pause-Minutes

Bank of Canada officials worried about sticky price and wage gains and elevated inflation expectations even while pausing interest-rate hikes without actively debating a ninth straight increase, the March 8 decision minutes published Wednesday showed.

Officials "remain concerned about the risk that inflation could get stuck materially above the 2% target" and the press release should stress "the conditionality of the pause" with upside risks more concerning, the minutes showed. Governor Tiff Macklem and his deputies agreed their outlook for slowing growth and inflation remained on track, justifying a pause to assess how rate hikes would bring demand back in line with supply. 

"Short-term inflation expectations are higher than in the Bank’s own inflation forecast. If they do not come down, high inflation will be stickier than expected," the minutes showed. Wage growth between 4% and 5% was also too hot and must moderate through some combination of slower gains and a turnaround of weak productivity, Governing Council members found.

The Bank held the overnight lending target at 4.5% at the March 8 decision and officials said they are likely on hold unless inflation veers away from a projection for CPI to slow to about 3% at midyear and back to the 2% target in 2024. While the backdrop in financial markets has deteriorated since the meeting on the collapse of SVB and Credit Suisse, they underline the BOC had already shifted to the sidelines, making its job easier than the Fed and ECB who had sent hawkish signals.

"Governing Council saw the pause as an opportunity to learn whether interest rates had increased enough to return inflation to the 2% target," the minutes said. "They would be looking for evidence that monetary policy was sufficiently restrictive."

Investor bets on the BOC have swung back since the global banking turmoil to a potential rate cut this year, after some earlier bets that a hot job market and resilient economy would bring more tightening. 

Minutes published Wednesday are the second edition of a program that began in January following a recommendation from the IMF. The Bank doesn't publish vote tallies in a system where only the Governor is legally responsible for policy. The Governor and his deputies often say they come to a decision by consensus.