The Bank of Canada contemplated not raising interest rates last month but with the economy outperforming expectations, its governing council ultimately decided in favour of one more rate hike before taking a pause.

In its first-ever summary of deliberations, the Bank of Canada pointed to a tight labour market, strong GDP growth and the risk of inflation getting stuck above two per cent as the rationale for raising its key rate by a quarter of a percentage point on Jan. 25.

The summary published Wednesday outlined what the council – made up of the governor and his deputies – discussed during meetings about the rate decision.

BMO managing director of Canadian rates and macro strategist Benjamin Reitzes said the biggest revelation from the summary was that the central bank was actually considering holding its key interest rate last month, suggesting it was taking a more tepid approach than markets had thought.

“The fact that they considered not raising rates was a little bit of a surprise,” Reitzes said.

But the Bank of Canada’s rationale for raising rates was exactly right, he added, noting the economy has been running hotter-than-expected.

“We’ve seen some signs of a slowdown, but not nearly enough to really warrant extreme concern at this point,” he said.

In December, Canada’s unemployment rate was five per cent, just above the record-low of 4.9 per cent reached in the summer. Economic growth has also beat expectations toward the end of 2022.

The Bank of Canada’s rate hikes are expected to be felt more broadly in the economy this year.

The governing council unanimously agreed that the central bank’s action to date had been aggressive and the full economic effects of rate hikes have not yet been felt.

“All governing council members acknowledged they were approaching this decision with a similar view: that the bank’s monetary policy to date had been forceful and that the full impact would be felt in quarters to come,” the summary said.

The central bank has hiked its key rate eight consecutive times since March 2022, bringing it from near zero to 4.5 per cent. That’s the highest it’s been since 2007.

With the first rate hike of the year, the central bank indicated that it would take a conditional pause to assess how the economy is responding to higher rates.

The summary also revealed that the Bank of Canada is concerned inflation might be stickier than expected.

“Persistence in supply chain challenges, services price inflation, wage growth and inflation expectations could all keep inflation above the target,” the summary said. “A rebound in oil prices could also push inflation back up again.”

Headline inflation has fallen from its peak of 8.1 per cent seen in June to 6.3 per cent in December. The Bank of Canada is forecasting the annual inflation rate will fall to three per cent by mid-2023 and to its two per cent target in 2024.

According to the summary, after some deliberation on what forward guidance the central bank should give, governing council members were in broad agreement to signal a pause to convey that the bar for raising rates further is now higher.

Reitzes said the summary makes it clear that a rate hike in March is “off the table.”

The release of the five-page summary follows a recommendation from the International Monetary Fund to increase transparency about the rate decision process.

It also provides a glimpse into what the Bank of Canada’s governing council considers when making policy decisions, something economists and forecasters often try to understand.

Reitzes said the summary was a welcome addition and “provided a little bit more colour around the policy decision.”

As the Bank of Canada monitors how the economy reacts to higher borrowing costs, the summary shows it is closely watching global and domestic economic developments.

The council spent a “considerable” amount of time discussing the potential effects of China lifting COVID-19 restrictions, according to the summary, with a particular concern about the effect the reopening could have on oil prices.

“If Chinese demand were to rebound by more than anticipated, oil prices could rise substantially, putting renewed upside pressure on Canadian and global inflation,” the summary said.

Domestically, the governing council noted declines in consumption and housing activity indicate the economy is slowing.

However, Statistics Canada’s preliminary estimate for real GDP in the fourth quarter suggests higher growth than the Bank of Canada’s previous expectations.

The central bank has also said Canada’s tight labour market is a sign of an overheated economy. In December, the unemployment rate was five per cent, just above the record-low of 4.9 per cent reached in the summer.

But the council is still encouraged by signs of inflation slowing.

In the summary, the council acknowledged that much of that slowdown is the result of lower gasoline prices, but members noted the decline in durable goods inflation suggests higher interest rates are working to slow demand.

This report by The Canadian Press was first published Feb. 8, 2023.