EconoFACTS

July 26, 2023 | 14:00

BoC Summary of Deliberations — One Meeting at a Time

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

The summary of the Bank of Canada’s deliberations from the July 12^th meeting didn’t reveal any major new information, but reiterated a hawkish tilt. Recall that meeting marked a second consecutive 25 bp rate hike, which took the policy rate to 5%, or the highest since March 2001.

At a high level, the Bank remained surprised by persistent demand, especially at the household/consumer level. They attribute it to many of the factors we often cite—strong job market; built-up savings; population growth; and pent-up services demand. Notably, the Bank delved into its view on the impact of surging population growth, from which there are both inflationary and disinflationary forces. We’ve long suspected that the immediate inflationary impact on the demand for housing, goods and infrastructure outweighs the immediate disinflationary impact from labour supply (the latter stretches out over a much longer period). While there’s uncertainty there, the Bank for now deems the immediate impact as neutral.

That said, the Bank also sees some signs that tighter policy is working. Namely, this shows through in Business Outlook Survey data (e.g., investment intentions and sales expectations), as well some early evidence that the extreme tightness in the job market is easing (e.g., easing wage growth and an uptick in the jobless rate). On the latter, it’s still too soon to say definitively.

On inflation, the Bank sounds a bit more hawkish, especially with respect to stubbornness of core inflation. They say that, “while Governing Council members were encouraged by the drop in CPI inflation, the persistence of measures of core inflation suggested the return to the 2% target would take longer than previously forecast. Members agreed that there was considerable uncertainty around the outlook for inflation given the persistence of core inflation and countervailing forces supporting demand.” Since this meeting, the June CPI report saw another encouraging move in headline CPI, but shorter-term core inflation metrics remained stubborn.

So, here is basically what the Bank is grappling with right now. Either policy isn’t tight enough; or it is, but hasn’t been tight enough for long enough. Looking ahead, the Bank says that “given the uncertainties around the forecast and the size and timing of the impact of higher interest rates on demand, they would approach future decisions one at a time based on the available evidence”. Our official call is that the Bank is done raising rates. But the risk remains to the upside as their bias is to tighten further; and rate cuts remain a discussion for next year.