Bank of Canada deliberations show ‘rate cuts are not imminent,’ economist says

The Bank of Canada’s top officials cited a “mixed picture” on the direction for underlying inflation and the Canadian economy in deciding to hold its benchmark interest rate late last month, newly released deliberations show.

The central bank on Wednesday released the minutes from the governing council meeting in January that led to the policy rate holding steady at 5.0 per cent for the fourth consecutive decision.

The documents show the Bank of Canada’s top monetary policymakers discussed the outlook for inflation amid pressures from rising shelter costs, hot wage growth and elevated price expectations from consumers.

While the governing council indicated that recent weakness in the economy should continue to chill inflation going forward, these signs of stubbornness in taming price pressures made it difficult to say with certainty how long interest rates would need to stay at the current restrictive levels.

“Overall, members agreed that these indicators painted a mixed picture of underlying inflation. More time was needed for past interest rate increases to relieve price pressures,” the deliberations read.

Inflation has cooled from highs seen in June 2022, most recently coming in at 3.4 per cent in December 2023. But shelter inflation continues to run hotter than the overall consumer basket and wage growth is holding firm as productivity falters, which the governing council highlighted as a possible inflationary fuel in its discussions.

1:49 Economists expect spring interest rate cut after Bank of Canada holds steady

The Bank of Canada’s closely watched metrics of core inflation also continue to run around 3.5 per cent – above the central bank’s two per cent target.

While not barring future inflation shocks, the Bank of Canada has indicated that upcoming decisions will likely shift toward discussions of how long it needs to keep the policy rate at current levels.

But based on the current outlooks for inflation, “it was difficult to foresee when it would be appropriate to begin cutting interest rates,” the deliberations read.

The governing council acknowledged in the deliberations that keeping the policy rate elevated for long risks making economic conditions “more painful than necessary.”

But officials noted in their discussions that if the bank moved to cut rates “prematurely,” it might be forced to raise them again to bring inflation all the way back down to two per cent.

Forecasters and market watchers have so far pencilled in interest rate cuts beginning as early as April or June this year.

BMO senior economist Robert Kavcic said in a note to clients after the deliberations were released Wednesday that the cloudiness in the governing council’s rate cut timeline signals that the Bank of Canada is willing to be patient before it moves to ease monetary policy.

“Rate cuts are not imminent,” Kavcic wrote.

Governing council also highlighted risks that a pickup in the housing market would keep shelter prices inflated. Early data from local housing boards for January show a hot start to the year in markets such as Toronto.

The governing council discussed risks that if “the housing market rebounded more than expected” in the spring, shelter inflation could keep the overall consumer price index “materially above” the two per cent target even as the slowing economy sees other pressures ease.

The Bank of Canada has recently emphasized its limited influence over shelter inflation, which factors in home prices, surging rent costs and Canadians paying more on their mortgages. Governor Tiff Macklem reiterated in a Tuesday speech to the Montreal Council on Foreign Relations that structural supply lags in the housing market are keeping shelter inflation sticky, with little impact from the central bank’s policy rate.

1:41 BoC monetary policy targets inflation, not housing: Macklem

The deliberations also point to concern that cooling in the labour market could swing to job losses rather than just the declines in vacancies seen so far.

The governing council noted that with labour shortages easing and the economy shifting from excess demand to excess supply, pressure in the jobs market should see wage growth moderate in the coming months. The Bank of Canada has continued to highlight that average annual wage hikes in the realm of four to five per cent is inconsistent with taming inflation without associated gains in productivity.

While employers may opt to hold onto workers through the projected economic slowdown, the Bank of Canada officials noted that with job vacancies now lower, “future market adjustments could come more through increases in unemployment.”

The Bank of Canada will get a fresh look at how the jobs market performed in January with the release of the Labour Force Survey on Friday.