Concerns Over Inflation and Slow Process of Reaching Target
Senior officials at the Bank of Canada were uncertain about the appropriate timing for rate cuts to support the country’s weakened economy, according to minutes from the central bank’s deliberations ahead of a policy decision. The minutes revealed that officials were concerned about the impact of shelter costs and strong wage gains on inflation levels, which could potentially keep inflation elevated.
While the Bank of Canada’s benchmark rate of 5% was deemed sufficient to slow down economic activity and exert downward pressure on inflation, achieving the central bank’s 2% inflation target was expected to be a gradual process. As a result, the policy rate remained unchanged at 5% during the Jan. 24 decision, with a focus on determining how long it would need to stay at that level in order to reach the inflation target.
According to the minutes, officials acknowledged the challenge of predicting when it would be appropriate to begin cutting interest rates based on the available information.
Concerns About Shelter Costs and Wage Growth
The minutes also highlighted concerns about the impact of shelter costs on inflation. There were apprehensions that a potential rebound in the housing market in spring 2024 could keep shelter inflation significantly above the target, even if price pressures in other sectors of the economy eased.
Furthermore, there was broad concern among officials regarding annual wage growth in Canada, which stood between 4% and 5%. Adjusted unit labor costs were noted to be above pre-pandemic levels. While officials acknowledged that businesses had various means to absorb higher wages, they cautioned that if real wages continued to grow at a significantly faster pace than productivity, it could contribute to inflationary pressures.
The Bank of Canada will continue to closely monitor these factors as it evaluates the appropriate timing for potential rate cuts.