Bank of Canada divided on when to begin dropping interest rates
Bank of Canada (BoC) members are split on when to begin dropping interest rates.
Canada’s central bank released its summary of deliberations from the last key interest rate announcement on April 10. It held the rate at 5% for the third time this year.
It revealed how much assurance BoC members need and what conditions would need to be in place to start reducing interest rates.
Bank of Canada maintains policy rate, continues quantitative tighteninghttps://t.co/m4DvdKKGjk#economy #cdnecon
— Bank of Canada (@bankofcanada) April 10, 2024
Some felt they needed more assurance that inflation wouldn’t pick up again, jeopardizing the progress made so far.
“Some members emphasized that, with the economy performing well, the risk had diminished that restrictive monetary policy would slow the economy more than necessary to return inflation to target,” reads the summary.
“Stronger domestic demand, coupled with robust US growth, could keep core inflation from slowing further, or it could even pick up again in the event of new surprises,” it added.
Others were more certain about the progress Canada has made in bringing inflation down.
“Inflation across most goods and services had come down significantly,” reads the deliberation. “Coupled with indicators that the economy was in excess supply and with a base case projection showing the output gap starting to close only next year, they felt there was a risk of keeping monetary policy more restrictive than needed.”
The governing council’s members also discussed some of the risks involved in dropping or maintaining interest rates.
One of the main uncertainties is that housing market activity could accelerate and further boost home prices. According to the summary, members acknowledged that reducing interest rates could increase the likelihood of this happening.
Population growth is another factor the BoC has considered, with its projection taking into account continued strong population growth in the first half of 2024 followed by softer growth.
However, since the federal government’s plan to reduce non-permanent residents has not been fully announced, the governing council agreed to update the population forecast each quarter.
Ultimately, the BoC came to the conclusion that inflation was still too high.
“Governing Council had stressed it was looking for ‘further and sustained easing in core inflation,'” reads the summary. “Members agreed that the decline in core inflation in January and February was ‘further’ easing, and they wanted to see this easing ‘sustained.'”