The Bank of Canada expects it will be able to begin cutting interest rates sometime this year, but officials are split on timing, a newly released summary of deliberations shows.Sean Kilpatrick/The Canadian Press
The Bank of Canada’s governing council believes it will be appropriate to cut interest rates this year if the economy develops as expected, although there is disagreement among members on the likely timeline, according to a summary of discussions that took place ahead of the latest rate decision.
Governor Tiff Macklem and his deputies kept the policy rate steady at 5 per cent on March 6, the fifth consecutive hold since last summer.
While they remain concerned about stubborn inflation and the risk of easing monetary policy too soon, Canada’s top central bankers are now openly discussing the timing of rate cuts – albeit with reservations.
“Members agreed that if the economy evolves in line with the Bank’s projection, the conditions for rate cuts should materialize over the course of this year,” said the summary of deliberations, published Wednesday.
“However, there was some diversity of views among Governing Council members about when there would likely be enough evidence that these conditions were in place, and how to weight the risks to the outlook.”
The argument for lowering interest rates was bolstered on Tuesday, when Statistics Canada reported a surprising drop in inflation in February. The consumer price index rose at an annual rate of 2.8 per cent, the second consecutive month that inflation has been back within the Bank of Canada’s 1-per-cent-to-3-per-cent target range.
After that data, Bay Street analysts and traders upped their bets that the central bank will begin lowering interest rates in June, although an earlier cut in April or a later first cut in July are possible.
In some ways the Summary of Deliberations is already stale, given the new inflation data. But it does contain important insights into how central bankers are thinking about the housing market, the correct way of measuring underlying inflation and wage pressures.
In particular, policy makers are nervous about a rebound in real estate, with would-be buyers rushing back into the market in anticipation of rate cuts.
“While house prices continued to fall in January, recent strength in resales could translate into a pickup in house prices and stoke shelter price inflation,” the summary said.
Shelter inflation, which is the biggest driver of overall CPI inflation, is a challenge for the central bank. A big part of it is tied to rising mortgage interest costs, which are the direct result of the bank’s past interest rate hikes. Bank officials have also said that rising rents stem from an imbalance between housing supply and population growth that can’t be fixed by changing interest rates.
That’s led some analysts to suggest the bank should look past shelter inflation when setting interest rates. But the bank does not seem especially keen on this argument.
“Members agreed that if mortgage interest costs were the only component holding up inflation, there could be some capacity to look through them, so as not to unduly restrain economic activity to get headline inflation back to 2 per cent. However, this was not the current situation,” the summary said.
“Most components of shelter inflation, such as rent and expenses related to home ownership (including insurance, taxes and repairs), were still rising significantly in January.”
A second key insight from the document is that bank officials are taking an expansive view of “underlying inflation.”
For months, they’ve said they want to see a sustained drop in underlying inflation before cutting rates, although it has never been clear what metrics they are talking about.
The summary clarified that they are not just looking at CPI-trim and CPI-median, their two preferred measures of core inflation. They are also looking at other measures like CPI excluding food and energy, as well as “the distribution of inflation rates across components of the CPI basket.”
Alongside measures of underlying inflation, Mr. Macklem and his team are watching other indicators, such as the overall balance between supply and demand in the economy, corporate pricing behaviour, inflation expectations and wage growth.
While most of these are trending in the right direction, the pace of wage growth has remained higher than the bank thinks is compatible with 2 per cent inflation. These labour market dynamics, however, are starting to change.
“Governing Council members noted that recent data were beginning to show signs of easing wage pressures,” the summary said, noting that data from Statistics Canada’s Survey of Employment, Payrolls and Hours and National Accounts were lower than in the Labour Force Survey.
The bank’s next interest rate decision is on April 10.
