Bank of Canada Publishes Rate Hike Rationale for First Time

Bank of Canada Governor Tiff Macklem gestures during a press conference at the Bank of Canada in Ottawa, on Oct. 26, 2022. The Canadian Press/Sean Kilpatrick

Canada’s central bank published on Feb. 8 a summary of internal deliberations that led to its latest policy rate hike of Jan. 25, a first for the institution in a bid to increase transparency.

The account states that the Bank of Canada’s (BoC) governing council began its discussions on whether to maintain or raise the rate by reviewing international events.

It noted the substantial decline in global energy prices, the easing of supply chain bottlenecks, and the sudden lifting of COVID-19 restrictions in China.

The account says that the council spent “considerable time” discussing China, seeing the latest development as a source of uncertainty.

Specifically, the reopening of China could lead to oil prices rising “substantially.”

On the domestic front, meeting attendees remarked that Canada’s economy grew more than expected in the third quarter (+2.9 percent GDP) and was likely to come in higher than predicted in the fourth.

“So, while the economy was certainly slowing, there was more excess demand than expected,” says the account.

The meeting was presided by BoC Governor Tiff Macklem and attended by deputies Carolyn Rogers, Paul Beaudry, Toni Gravelle, and Sharon Kozicki.

The governing council weighed whether to keep the policy rate at 4.25 percent or to raise it by 0.25 basis points.

The labour market being tight, the level of economic activity, and a risk of inflation “getting stuck somewhere above 2%” led the council to raise instead of maintaining.

“Members were in broad agreement that, going forward, it would be appropriate to pause any additional tightening to allow economic developments to unfold,” says the deliberations.

“The Bank had been forceful to date in tightening monetary policy, and the full impact was still to come.”

The move to publish these deliberations follows a report on the BoC’s transparency by the International Monetary Fund (IMF) published on Sept. 28, 2022.

The IMF called the BoC “one of the pioneers” of communication on monetary policy, but recommended it could provide more information on its deliberations to respond to the “dynamic notion of transparency and heightened economic uncertainty.”

The BoC announced on the same day the IMF report was released that it would start releasing policy rate deliberations in January 2023.

High Rates Are ‘Working’

BoC Governor Macklem gave a speech on Feb. 7 to CFA Québec, a financial investors organization.

Macklem said that inflation is “turning the corner” and that “monetary policy is working,” though he also noted that the prices for food and other services are still increasing too quickly.

One area where higher rates have had a very notable cooling effect is the housing market.

Macklem said that house prices have been down nationally 13 percent since their peak in February last year.

The BoC embarked on a forceful monetary policy to reign in inflation in March 2022, lifting its policy rate by 4.25 basis points since.

Inflation, as measured by the Consumer Price Index, peaked at 8.1 percent during the summer and its latest reading was 6.3 percent in December.

Macklem said he expects economic growth to be close to zero for the next three quarters.

“There are risks to our projection. The biggest is that global energy prices could increase, pushing inflation up around the world,” he said.

“We’re also concerned that inflation expectations could remain elevated and increases in labour costs could persist.”

In these circumstances, Macklem said the BoC would consider raising rates further in an attempt to get back to its 2 percent inflation target.

The next rate announcement will take place on March 8.