Some Bank of Canada Officials Believed Rates Would Need to Go Higher, Minutes Say

The minutes, published Wednesday, suggest a compromise emerged among the six members of the Bank of Canada’s governing council, in which they agreed to exhibit patience and keep rates unchanged, and clearly state in the rate-policy statement that the central bank was prepared to raise its policy rate further should inflation fail to slow.

“Some members felt that it was more likely than not that the policy rate would need to increase further to return inflation to target,” the minutes said, adding that the lack of downward momentum in underlying, or core, inflation was a source of concern. “Others viewed the most likely scenario as one where a 5% policy rate would be sufficient to get inflation back to the 2% target, provided it was maintained at that level for long enough.”

The minutes are a summary of deliberations among the half-dozen governing council members, who started discussing their options eight days prior to the rate decision. The Oct. 25 statement said steeper borrowing costs had dampened consumption, and excess supply–or slack in the economy–was starting to accumulate. It also warned that progress toward reaching the central bank’s 2% inflation target was slow.

After peaking at 8.1% in June of last year, inflation has decelerated and reached 3.8% in September. The minutes indicate governing-council members believed either higher rates needed more time to work through the economy to curb upward price pressures, or rates weren’t high enough to relieve upward price pressures. The central bank said last month it expects inflation to reach 3.5% by mid-2024, and 2% by the end of 2025.

The minutes said Bank of Canada officials noted inflation expectations, while elevated, were easing. “Thus, current household spending and business decisions more likely reflected recent experiences with inflation rather than an acceptance that high inflation was here to stay.”

During the deliberations, senior central bank officials agreed that spending by Canadian governments was set to rise 2.5% in 2024, or faster than the pace of potential output–or the rate of growth the economy can sustain without triggering inflationary pressure. “By adding to demand at a faster pace than the growth of supply, government spending could get in the way of returning inflation to target,” the minutes said.

Senior Bank of Canada officials also expressed worry over housing and how it could keep inflation elevated, the minutes said. Besides rising mortgage-interest costs, rent and other housing-related costs were keeping annual shelter inflation in the 6% range. “The ongoing structural shortage of housing supply in the economy was sustaining elevated house prices,” the minutes said, “and the rapid increase in Canada’s population had added to the existing imbalance between demand and supply for housing.”

Nearly all of that population growth is due to immigration.

Write to Paul Vieira at [email protected]