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In its very first summary of deliberations released this month, the Bank of Canada (BoC) pointed to a tight labour market, strong GDP growth and the risk of inflation getting stuck above 2% as the rationale for raising its key rate by a quarter of a percentage point on January 25th.

In fact, the BoC contemplated not raising interest rates last month but, with the economy outperforming expectations, its governing council ultimately decided in favour of one more rate hike before taking a pause. 

Still, the council is encouraged by signs of inflation slowing. The summary acknowledges that much of that slowdown is the result of lower gasoline prices, but members note the decline in durable goods inflation suggests higher interest rates are working to slow demand.

BoC rate hikes are expected to be felt more broadly in the economy this year. The governing council unanimously agreed that the central bank’s action to date – eight consecutive interest rate increases since March 2022 – had been aggressive and the full economic effects of rate hikes have not yet been felt. 

The sectors of the economy most sensitive to interest rates had clearly responded to tighter monetary policy, and evidence was starting to appear that other parts of the economy were beginning to respond.

Members viewed these as signs of progress toward restoring price stability and noted them in combination with some other key developments:

  • Inflation in both Canada and globally was declining due to sizable decreases in energy prices and should decline further if energy prices stayed near current levels
  • Global supply chain disruptions were resolving
  • Markets were increasingly perceiving that much worse outcomes – even higher inflation or severe economic contractions – were less likely

Increased transparency on rate decisions

The release of the five-page summary follows a recommendation from the International Monetary Fund to increase transparency about the rate decision process. 

The summary also provides a glimpse into what the BoC’s governing council considers when making policy decisions – something economists and forecasters often try to understand.

Have questions about the Bank of Canada decisions and/or interest rates in general? Answers are a call or email away!