Mar 22, 2023
Bank of Canada still concerned about potentially sticky inflation, says economy still too hot
The Canadian Press
Expect sharp disinflation in the coming months: Charles St-Arnaud
The Bank of Canada didn't discuss raising interest rates earlier this month in its deliberations, but members were still concerned inflation might be harder to bring down than expected.
On Wednesday, the central bank published a summary on the governing council’s deliberations ahead of its decision to hold its key interest rate steady on March 8.
The members of the governing council, which include governor TIff Macklem and his deputies, were encouraged to see the economy and inflation both slowing, supporting their decision to hold the key interest rate steady at 4.5 per cent.
The summary made no mention of members discussing whether they should raise the key interest rate on March 8.
However, the governing council remained concerned about the risk of inflation getting stuck above two per cent and agreed that demand was still outstripping supply in the economy.
In the fourth quarter, the Canadian economy posted no growth as the accumulation of business inventories slowed.
“With inventories adjusting earlier than anticipated, governing council concluded that growth in early 2023 may be a bit stronger than the bank had forecast,” the summary said.
Ahead of the federal and provincial governments rolling out their budgets, the governing council also discussed the risk of elevated government spending further fueling demand in the economy.
Finance Minister Chrystia Freeland has pledged that her March 28 budget will be fiscally restrained, noting that the federal government doesn’t want to make the Bank of Canada’s job of fighting inflation harder.
The central bank said it will incorporate the fiscal plans of both levels of government into its updated projections to be released in the next monetary policy report.
The Bank of Canada will release the report along with its next interest rate decision on April 12.
Economists widely expect the central bank to continue holding its key interest rate steady.
The latest consumer price index report showed inflation slowed further in February, with the annual rate falling to 5.2 per cent.
However, an ongoing concern for the Bank of Canada is the tight labour market and strong wage growth.
The unemployment rate continues to hover near record lows, while average hourly wages have been increasing at an annual rate of four to five per cent.
The Bank of Canada notes in its summary of deliberations that the governing council continues to believe that the pace of wage growth will make it harder to get inflation back to its two per cent target, given wage growth isn’t accompanied with productivity growth.
This report by The Canadian Press was first published March 22 2023.