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Bank of Canada wary of premature rate cuts as underlying inflation persists

Published 02/07/2024, 01:32 PM
Updated 02/07/2024, 03:31 PM
© Reuters. FILE PHOTO: A sign framed by maple leaves is pictured in front of the Bank of Canada building in Ottawa July 17, 2012.   REUTERS/Chris Wattie/File Photo

By Promit Mukherjee

OTTAWA (Reuters) -Members of the Bank of Canada's (BoC) governing council were concerned about cutting borrowing costs too soon amid persistent inflation when they decided to keep the key overnight rate on hold on Jan. 24, minutes published on Wednesday showed.

The policy-setting governing council was "particularly concerned about the persistence of inflation and did not want to lower interest rates prematurely," the minutes said.

The Bank of Canada (BoC) aims to keep inflation at 2% and has increased its key overnight rate 10 times in 17 months to a 22-year high of 5% to tame inflation.

Shelter price inflation, which includes mortgage interest costs, rent and components related to house prices, remained the biggest contributor to above-target inflation, the minutes said.

"Members expressed concern that, going forward, shelter price inflation would continue to keep overall inflation elevated," the summary of deliberations said.

The governing council was worried that if the housing market rebounded more than expected in the spring of 2024, shelter inflation could keep inflation materially above the target even while other price pressures abated, the minutes said.

"Bank of Canada cannot ignore shelter costs ... and they know if shelter costs did not moderate, they would need to remain restricted for longer," said Andrew Kelvin, chief Canada strategist at TD Securities.

He said the deliberations at the governing council meeting seem to point to that.

Canada's shelter costs, which account for over a quarter of its CPI basket, rose 6% in December year on year even as the overall inflation figure came in at 3.4%.

Governor Tiff Macklem, while addressing a press conference at the Montreal Council of Foreign Relations on Tuesday, said the BoC expects a modest increase in prices in housing in 2024 and that was built into its forecasts.

The minutes showed that the BoC was also fretting about an increase in wages amid zero productivity growth, which could have further inflationary pressures. Wages have been growing between 4% and 5% annually.

"Members expected wage growth to moderate gradually," the minutes said.

The central bank also sees risk to growth, as restrictive monetary policy could impact consumer spending and cause a marked contraction in economic activity, forcing the BoC to ease interest rates "earlier and more quickly than anticipated."

© Reuters. FILE PHOTO: A sign framed by maple leaves is pictured in front of the Bank of Canada building in Ottawa July 17, 2012.   REUTERS/Chris Wattie/File Photo

A raft of recent data where some indicators suggest inflation is easing even as shelter and food costs remain elevated has left policymakers in "wait-and-see mode," said Royce Mendes, head of macro strategy for Desjardins Group.

The governing council minutes showed that they agreed that the current rise in the overnight interest rate above the policy rate target was primarily because of an increased demand for government bonds.

Latest comments

The WEF backed central banks want to destroy the global economy, so of course it's higher for longer - all the insiders have pretty much now sold out over the past three months at all time highs thanks to Jerome's comments in December followed by the largest share buy back programme in history - so the rug pull should pretty much start either this Friday or next Black Monday
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