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Bank of Canada decided interest rates need more time to work

The indicators that the central bank is observing paint “a mixed picture” of underlying inflation

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The Bank of Canada believes current interest rates are high enough to control inflation, but will not consider reducing them until it is satisfied that price stability has been restored.

The central bank left its key overnight interest rate at five percent last month and central bankers are now weighing how much longer it will have to stay at that level, according to a summary of the deliberations that led to the decision to keep it on hold. January 24. . Still, with core inflation around 3.5 percent and wage growth high, the bank’s governing council did not see enough signs to reduce the key overnight rate.

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“The current monetary policy stance was easing price pressures, but more time was needed to restore price stability,” the central bankers concluded, adding that governing council members agreed that rates interest rates appeared to be “sufficiently restrictive” to ultimately meet its inflation target.

To justify a rate cut, central bankers said they would need to see more evidence of progress towards price stability and a clear downward momentum in core inflation, according to the summary of deliberations, published on February 7.

They examined scenarios that would accelerate or delay a rate cut. In the first scenario, monetary policy could have a larger-than-expected impact on consumer spending, particularly when consumer confidence is already low.

“This could lead to a sharp contraction in economic activity, a larger and faster rise in the unemployment rate and more disinflationary pressure than expected,” the central bankers said. “In this scenario, monetary policy would probably have to be eased earlier and more quickly than expected.”

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Conversely, monetary policy would have to remain restrictive for longer if inflation is more persistent than expected, even with a slowdown in economic growth.

“This could happen if near-term inflation expectations remain elevated and growth in unit labor and housing costs do not moderate,” the central bankers concluded.

The summary of the deliberations said the Bank of Canada is watching several key indicators, including the balance of supply and demand in the economy, the behavior of corporate prices, inflation expectations and wage growth relative to the productivity.

Central bankers noted that labor market conditions were improving and corporate pricing behavior was “normalizing” as a sharp rise in rates over an 18-month period starting in spring 2022 continued to open. step in the system.

However, governing council members agreed that the indicators they are watching “paint a mixed picture” for core inflation and that more time was needed for previous interest rate increases to ease price pressures.

“With inflation still too high and too broad-based, members wanted to make clear in their communications that they were still concerned about the persistence of core inflation.”

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Central bankers said higher rates were slowing the Canadian economy and agreed they had to continue balancing the risks of excessive tightening with the risks of doing too little to control inflation.

“While members did not want to make economic conditions more painful than necessary, they were particularly concerned about the persistence of inflation and did not want to lower interest rates prematurely, only to have to raise them again to bring inflation back to two percent. objective,” said the summary of the deliberations.

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The central bank’s governing council expected the economy to weaken in the short term, and members agreed that if the economy developed in line with this projection, it would likely lead to a further easing of inflationary pressures.

“However, members remained concerned about risks to the inflation outlook, particularly the persistence of core inflation,” according to the summary of deliberations.

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