The Bank of Canada’s Governing Council is hesitant to pinpoint when they might begin easing interest rates, as indicated in the summary of discussions from their January 24 meeting.
Remaining open to the possibility of further rate hikes in response to inflationary surprises, the council of six members also emphasizes the importance of future rate decisions centering on how long to maintain the policy rate at its current level of 5.00% to mitigate inflationary pressures.
“The council recognized that, based on the information available, it was difficult to foresee when it would be appropriate to begin cutting interest rates,” reads the summary.
“While members did not want to make economic conditions more painful than necessary, they were particularly concerned about the persistence of inflation and did not want to lower interest rates prematurely, only to have to raise them again to get inflation back to the 2% target,” it continued.
At their January monetary policy meeting, where they opted to keep the key benchmark rate unchanged, members expressed the expectation of continued economic weakness “in the near term,” which they believe will help alleviate inflationary pressures.
The headline Consumer Price Index (CPI) inflation rate has since dropped from a high of 8.1% in June 2022 to its current rate of 3.4%. Despite this improvement, along with a softening of short-term inflation expectations, council members remain concerned about underlying inflation.
BoC concerned about the impact of housing costs on inflation
The Bank of Canada has recently voiced more direct and explicit concerns regarding the significant impact of rising shelter costs on overall inflation.
The topic was revisited at its January 24 meeting, where members “expressed concern” that shelter price inflation could continue to keep overall inflation elevated.
“They discussed the risk that if the housing market rebounded more than expected in the spring of 2024, shelter inflation could keep CPI inflation materially above the target even while price pressures in other parts of the economy abated,” the summary reads.
The council also anticipates residential real estate activity to “pick up” in early 2024, though housing resale activity is still projected to remain weak.
High shelter costs contribute to weak economic growth
Moreover, high costs for both homeowners and renters are expected to dampen economic growth in the near term.
“Households will be renewing mortgages in 2024 at a higher interest rate, which will lower the amount of disposable income they have to spend on other goods and services,” the summary said, adding that renters who are also grappling with rising costs are “curtailing” their spending.
“While still below pre-pandemic levels overall, measures of financial stress had continued to edge up in recent months, particularly delinquency rates for non-mortgage debt,” the members noted.
Although the BoC says the Canadian economy has essentially “stalled” since the middle of 2023, it still sees some indicators that it remains in “modest excess supply.”
In its latest economic forecasts released in the January Monetary Policy Report, the Bank revised down its GDP growth forecasts, which it expects will be 1% for 2023 and 0.8% in 2024.
Going forward, the Bank’s Governing Council members said they will be closely monitoring key indicators, including the balance of supply and demand in the economy, corporate pricing behaviour, inflation expectations, and wage growth relative to productivity.