Evidence is mounting that the Bank of Canada’s benchmark interest rate is high enough to bring inflation all the way back to the two-per cent target, deliberations from the central bank’s latest rate decision show.
But policymakers at the Bank of Canada also expressed fears of a resurgence in the Canadian housing market that could keep inflation elevated if the central bank moves to rate cuts too quickly.
The Bank of Canada opted to hold its policy rate steady at 5.0 per cent for the third consecutive decision on Dec. 6, while maintaining warnings that another hike is in the cards if progress in taming inflation stalls.
Details released Wednesday of the governing council’s decision-making progress for that date show a growing acceptance that interest rate increases over the past two years have been successful at reining in consumption and relieving price pressures.
“Members agreed that the likelihood that monetary policy was sufficiently restrictive to achieve the inflation target had increased,” the deliberations read.
That differs from language in the deliberations released after the Oct. 25 rate hold, when the Bank of Canada noted that “some members felt that it was more likely than not that the policy rate would need to increase further to return inflation to target.”
Monetary policymakers said they were particularly encouraged by progress in the central bank’s preferred core inflation metrics since its last decision in October. They added, however, that one month of easing was not a trend.
Despite the growing confidence, the governing council continued to acknowledge risks remain in the inflation outlook and that further hikes may ultimately be necessary.
The deliberations highlighted ongoing pressure in shelter price inflation that “could make it more difficult” to hit the two-per cent inflation goal.
While some members of council said that costs related to housing prices would continue to ease under the weight of higher interest rates, others were concerned that shelter price inflation “could persist or even accelerate” amid a lack of supply and growing demand in the Canadian housing market.
Cutting interest rates too early — lowering the cost of borrowing for existing homeowners and prospective buyers — could reignite inflationary pressures, the council said.
“Members noted that if financial conditions eased prematurely, the housing market could rebound, further fuelling shelter price pressures,” the deliberations read.
Higher costs facing homeowners renewing their mortgages are an expected fuel to inflation during a tightening cycle. But governing council noted that strong growth in rent inflation, which hit a 40-year high of 8.2 per cent in October, and other housing costs like insurance, taxes and maintenance were “unusual.”
The deliberations pointed to a “structural shortage of supply” keeping housing prices elevated despite higher interest rates, and noted that monetary policy could not solve that problem.
Governing council also reiterated concerns about the pressure on inflation from annual wage growth holding around four to five per cent: “If this were to continue, it would not be consistent with achieving price stability, particularly given weak productivity.”
Policymakers did not receive any new survey data to inform them about changes in inflation expectations or corporate pricing behaviour between the two latest decisions, but the deliberations again highlighted these as areas the governing council is watching closely.
With expectations the economy will continue to slow into the new year, most big bank economists have started to pencil in interest rate cuts for the second or third quarter of 2024. Bank of Canada governor Tiff Macklem has continued to push back against those narratives, arguing in a speech last week that it’s “still too early” to talk about easing monetary policy.
Tuesday’s report on annual inflation for November came in higher than most economists’ forecasts, holding steady at 3.1 per cent amid ongoing pressure from services and shelter inflation.
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