The Bank of Canada’s governing council seems to be growing in confidence that the central bank will be able to lower its benchmark interest rate sometime this year, but newly released documents show there’s concern among monetary policymakers about risks to their outlook.
The Bank of Canada on Wednesday released a copy of the deliberations from its March 6 interest rate decision, when it held the policy rate steady at 5.0 per cent for the fifth time in a row.
Officials at the Bank of Canada have been mum about a timeline on when the central bank can start to lower the cost of borrowing, but governor Tiff Macklem has acknowledged that rates probably don’t need to move higher amid signs the economy is slowing and inflation is coming back under control.
In debating its March 6 decision, the governing council agreed that if the economy continues to evolve “in line with the Bank’s projection, the conditions for rate cuts should materialize over the course of this year.”
But the deliberations also cite a “diversity of views” among the council about when it would be clear there is enough evidence for rate cuts to move ahead, and how to weigh the risks in the central bank’s outlook.
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Among the biggest risks highlighted in the Bank of Canada’s deliberations is the possibility of a resurgent housing market.
“While house prices continued to fall in January, recent strength in resales could translate into a pickup in house prices and stoke shelter price inflation,” the minutes read.
Shelter price inflation remains the biggest fuel in overall inflation, which cooled further to 2.8 per cent year-over-year in February. Shelter prices accelerated to 6.5 per cent annual growth last month, up from 6.2 per cent in January, thanks to rising rents and mortgage costs.
James Orlando, director of economics at TD Bank, told Global News on Tuesday that the Bank of Canada likely does not want to lower interest rates during the spring housing market, as cheaper borrowing costs could fuel an uptick in real estate activity and inadvertently drive up shelter inflation.
He also said that, stripping out shelter costs, annual inflation would already be back at the Bank of Canada’s two per cent target.
Some economists have argued that as the Bank of Canada gauges how long its benchmark rate needs to stay elevated, it ought to look beyond the impact of shelter inflation, which the central bank itself has noted is driven by structural supply gaps in the housing market.
But the deliberations show the governing council isn’t willing to fully look past shelter costs.
If shelter inflation were solely fuelled by mortgage interest costs tied to the Bank of Canada’s own policy rate, the central bank might be willing to “look through” those pressures to avoid keeping rates high for too long and cooling the economy more than needed to achieve price stability.
But given the other factors fuelling shelter inflation – namely rent hikes and other housing costs like property taxes, insurance and repairs – the governing council indicated that it wouldn’t be looking past these sources of inflationary pressure.
Members of the council also pointed to signs that pressure from wage growth and corporate pricing behaviour were showing some signs of easing, but the council agreed to wait for more data to come in before feeling confident those factors would not reignite inflation.
The Bank of Canada’s next interest rate decision is set for April 10. Most economists expect the central bank to start lowering its policy rate around mid-year.
The U.S. Federal Reserve meanwhile held interest rates steady on Wednesday, but policymakers indicated they still expect to reduce them by three-quarters of a percentage point by the end of 2024 despite stodgier expected progress towards the central bank’s two per cent inflation target.
– with files from Reuters
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