EconoFACTS

February 08, 2023 | 14:21

BoC Summary of Deliberations (Jan. 25) — Pausing Time

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

The Bank of Canada's inaugural release of the Summary of Governing Council deliberations (a.k.a. minutes), leaned dovish, as it revealed policymakers considered pausing at the January meeting. However, the data showed continued economic resilience with better-than-expected GDP growth and a firmer labour market, which, combined with inflation risks still skewed to the upside, was enough to prompt the 25 bp rate hike, bringing policy rates up to 4.50%.

There was "broad agreement" on signalling a conditional pause going forward. The improving trend on inflation was encouraging for policymakers, even if much of the move was largely driven by the decline in energy prices. The BoC viewed the "decline in durable goods inflation as evidence that the effects of higher interest rates were spreading through the economy and slowing demand." At the same time, services inflation is expected to persist. The outlook anticipates that higher interest rates slow demand, supply chains continue to improve and energy prices remain behaved. While the risks to the projections are balanced, policymakers remain focused on upside risks.

The conditional pause is intended to signal that the bar for additional rate hikes is now higher, and would take upside surprises (on growth and/or inflation). Indeed, the Bank "would need an accumulation of evidence to determine whether further rate increases would be required". If the economy performs as forecast in the January Monetary Policy Report, more hikes would not be needed, consistent with what we heard from Governor Macklem at the late-January policy announcement and Tuesday's speech.

Key Takeaway: While a pause was considered at the January meeting, the stronger economic backdrop drove what could be a final 25 bp hike. At this point, the BoC wants to evaluate the impact of the 425 bps of hikes put in place over the past 11 months. The risk for policy remains skewed to more hikes through the first half of the year, at which point the risks likely start to turn the other way assuming inflation is well-behaved.