MNI BRIEF: Selected Text From BOC Governing Council Minutes

The following is the last section in the Bank of Canada's Summary of Deliberations (Minutes), published Wednesday from Ottawa:

The policy decision

While Governing Council was acutely aware of ongoing uncertainty, they concluded that data since the October MPR had largely reinforced their confidence that inflation would come down through 2023. 

Members framed the decision along two dimensions: 
⦁ whether to leave the policy rate where it was or to increase it by 25 basis points
⦁ whether to maintain similar forward-looking language as in the previous policy statement or to adjust it to signal a pause

The case for leaving the policy rate at 4.25% was that developments with respect to both the economy and inflation were beginning to move in the right direction and that policy had been forceful and just needed more time to do its work. 

The case for raising the rate by an additional 25 basis points was twofold. First, doing so reflected the fact that developments in the real economy since the December decision had been quite strong: 
⦁ Labour market data continued to indicate tightness.
⦁ Third quarter GDP growth was stronger than expected, and fourth quarter economic activity was also likely to be stronger than previously projected. 
In other words, data on both the labour market and economic activity suggested that there was more excess demand in the economy in the fourth quarter of 2022 than previously forecast.
A second rationale for raising the rate by an additional 25 basis points related to the risk of inflation getting stuck somewhere above 2% later in the projection. Putting in place some additional tightening now could help insure against that outcome. 

Members were in broad agreement that, going forward, it would be appropriate to pause any additional tightening to allow economic developments to unfold. The Bank had been forceful to date in tightening monetary policy, and the full impact was still to come. In addition, there were enough “green shoots” of progress. Allowing time for further progress to occur would recognize the lags in the transmission of monetary policy and balance the risk of over- versus under-tightening.

Members discussed how to communicate this need to pause. They reflected on their previous communication in December, which had indicated Governing Council would consider whether the policy interest rate needs to rise further. That communication had also articulated three developments Council would be assessing: 
⦁ how tighter monetary policy is working to slow demand 
⦁ how supply challenges are resolving 
⦁ how inflation and inflation expectations are responding

They agreed that the December communication conveyed more of a data-dependent, “decision-by-decision” stance about whether to raise the policy rate further. They debated whether that remained appropriate. Through further discussion, they drew a few conclusions:
⦁ Council wanted to convey that the bar for additional rate increases was now higher. If the economy and inflation were to unfold broadly in line with the projection, they agreed they would probably not need to raise rates further. 
⦁ Council also wanted to give a clear sense that they would need an accumulation of evidence to determine whether further rate increases would be required to return inflation to the 2% target.
⦁ Members also felt it was important to be clear about the conditionality of any pause. Given inflation was still well above the target, Governing Council continued to be more concerned about upside risks. In its determination to return inflation to the 2% target, Governing Council would be prepared to raise the policy rate further if these upside risks materialized.

Governing Council reached a consensus to increase the policy rate by 25 basis points and adjust its communications to indicate a conditional pause on any further policy tightening. Members also discussed the Bank’s quantitative tightening program. They agreed to continue the current policy of shrinking the balance sheet by allowing maturing bonds to roll off.