Canada’s tight labour market and hotter-than-expected economy pushed the central bank’s policymakers to a 25-basis-point interest rate hike in January, according to the first-ever look at governing council deliberations published Wednesday.
The Bank of Canada’s five-member governing council met a week before the Jan. 25 decision to weigh whether its benchmark policy rate, which had already soared four percentage points in under a year’s time, would need to rise further to fight inflation.
The prevailing factors pushing the central bank to another hike were the pressures of Canada’s tight labour market and that the national economy was outperforming its expectations to close out 2022, the summary of deliberations stated.
The governing council also expressed worries that while inflation was showing signs of cooling, there was a risk annual price pressures would bottom out before hitting the Bank’s two per cent target.
Heading into the governors’ meeting, the global inflation context had shown significant signs of easing — namely in energy prices. While the Bank’s policymakers were encouraged by progress on inflation globally, ongoing domestic price pressures gave cause for further concern.
Namely, the deliberations showed worry about “the risk of services inflation remaining sticky if labour costs stayed high and demand strong.”
“Rebalancing the labour market may take longer than usual given firms are still facing labour shortages and given the aging workforce is reducing the growth of labour supply,” the documents read.
Bank of Canada considered no rate hike, deliberations show
The central bank’s decision-making was largely split between either a 25-basis-point hike or leaving the rate unchanged, with larger steps seen regularly throughout the rate hike cycle appearing to be off the table in January.
Despite reaching a consensus for the quarter-point move, there were some factors that had the Bank mulling a pause in January.
The Bank’s governors considered leaving the rate unchanged to let the effect of its increases to date take hold in the economy — a position the central bank said it would take after the most recent hike.
The council also expressed concern that higher interest rates could hit the housing market harder than expected, should the home price decline accelerate.
The governing council decided that underlying factors such as strong immigration and high rates of Canadians building families and forming new households could be a buffer against further downsides here.
Bar for future rate hikes is higher now
The Bank of Canada will continue to publish its deliberations of each interest rate move in a bid to improve transparency in its decision-making around monetary policy.
Language around rate hikes acts as an important signal for economists, market watchers and everyday Canadians making decisions around the possible interest rate path.
According to the deliberations, the governing council decided its previous messaging from December — that future decisions would be “data dependent” going forward — didn’t convey “that the bar for additional rate increases was now higher.”
The council also discussed that it would have to be clear about the “conditionality” of the pause, and that if evidence began to accumulate showing inflation was not progressing in line with its forecast, it would be prepared to raise rates again.