When deciding to hold rates at its February meeting, the Bank of Canada took into consideration the fact Canada’s real estate and mortgage markets are more rate sensitive compared to other countries, including the U.S.
During deliberations at its March 8 meeting, the five-member Bank of Canada Governing Council discussed whether the resilience of the U.S. economy to higher interest rates and the persistence of elevated core inflation “foreshadowed similar developments” in Canada, according to a summary of its deliberations. In fact, today we saw the U.S. Fed raise its rate by a quarter point to 5.00%, now higher than the Bank of Canada’s benchmark rate of 4.50%.
“Tight labour markets in Canada could lead to more persistence in core inflation here, as they are doing in the United States,” the council considered, but also highlighted key differences between the two countries.
“More elevated levels of household debt and differences in the structure of the mortgage market mean that demand in Canada could be more sensitive to higher interest rates,” the panel determined.
Additionally, the council noted that higher immigration rates and “a stronger rebound in labour force participation rates in Canada, particularly among women, is helping relieve some of the pressures in labour markets.”
Canada saw the fastest rate of population growth among advanced economies in 2022, according to recent data released by Statistics Canada on Wednesday. The country’s population grew 2.7% in the year, or by more than 1.05 million people, bringing the total population to 39,566,248.
BoC was concerned about inflation “stuck” above 2%
While the Bank’s Governing Council was comfortable with its latest Monetary Policy Report forecasts for inflation to continue to ease this year, they nonetheless “remain concerned about the risk that inflation could get stuck materially above the 2% target,” the summary of deliberations shows.
The council determined that short-term inflation expectations “need to come down, as do measures of core inflation.”
It’s safe to assume the Bank was therefore pleased with February inflation data released on Tuesday, which showed headline inflation tumbling to 5.2%, with all three measures of core inflation also ticking down, albeit at a slower pace.
“As well, competitive pressures need to return to normal to make businesses cautious about passing on higher input costs to final goods prices,” the Bank said.
It also noted that short-term inflation expectations are higher than in the Bank’s own inflation forecast. “If they do not come down, high inflation will be stickier than expected,” it said.
The summary also captured the council’s desire to reinforce that its rate pause remains conditional while they assess whether the current level of monetary policy is “sufficiently restrictive.”
“Members agreed that it was important to emphasize the conditionality of the pause, and that they remain prepared to increase the policy rate further if needed to return the inflation rate to the 2% target,” the summary noted.
The Bank’s next rate decision is scheduled for April 12, 2023.
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