The Bank of Canada (BoC) has been cautious in its communication regarding its recent policy rate decision, aiming to avoid any misinterpretation that it had concluded its cycle of raising interest rates or that borrowing costs would soon decrease. This information was revealed in documents released on Wednesday, detailing the deliberations of the Bank's governing council leading up to its last rate decision.
The Bank's key interest rate was held steady at five percent earlier this month, a move that was largely anticipated by economists due to observed slowdowns in the economy and rises in the national unemployment rate. However, the BoC's governing council expressed concern that this decision could be misconstrued as an indication that rates would no longer increase or that cuts were imminent.
To mitigate this risk, the Bank emphasized that future rate paths would depend on incoming economic data and stressed their readiness to raise interest rates further if necessary. The BoC began releasing its deliberations for interest rate moves two weeks after the decision earlier this year, in an effort to increase transparency about monetary policy decisions.
Despite other aspects of the economy showing signs of easing amid higher interest rates, there are ongoing concerns about "a lack of progress in core inflation". August's consumer price index report from Statistics Canada showed headline inflation increasing to four percent, up from 3.3 percent the previous month, driven by higher gas and shelter costs. The BoC's preferred core inflation metrics also accelerated during August.
In response to these figures, Deputy Governor Sharon Kozicki stated that such high underlying inflation is not consistent with returning inflation back to the central bank’s two percent target. Furthermore, the Bank remains concerned about the pace of wage increases in the labor market, which have been around four and five percent annually in recent months.
Economists have noted that these figures put the BoC in a challenging position ahead of its next rate decision on Oct. 25, 2023. BMO Chief Economist Doug Porter suggested that while the chances of a rate hike in October have increased following the inflation data, he expects the Bank to wait for more signs of economic easing before raising borrowing costs again.
The BoC's careful communication approach reflects its earlier announcement this year of a pause on rate hikes to assess the effects of previous increases on the economy, which had shifted financial market discussions towards potential interest rate cuts.
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