Bank of Canada 'more optimistic' about rate strategy and inflation trends

The central bank is expecting weakness in consumption and business investment to continue for the foreseeable future

Bank of Canada 'more optimistic' about rate strategy and inflation trends

The Bank of Canada is becoming more optimistic about inflation trends, noting that “recent data pointed in the right direction,” its just released summary of deliberations for the December 6 interest rate decision.

“[Governing Council] members agreed that the likelihood that monetary policy was sufficiently restrictive to achieve the inflation target had increased,” the BoC said.

Among the major indicators that the central bank is looking at include weakness in consumption and business investment, which it expects to continue “for the next two to three quarters.”

“With the economy no longer in excess demand, members agreed they would be watching for signs that the slowdown in the economy was translating into further and sustained easing in inflation,” the BoC said.

The central bank is also considering the long-term impact of wage growth, which continues to hover in the 4%-5% range.

“If this were to continue, it would not be consistent with achieving price stability, particularly given weak productivity,” the BoC said.

“No new survey information had been released on either corporate pricing behaviour or the near-term inflation expectations of consumers and businesses. Members said they wanted to see more evidence that these indicators were trending in a direction that is consistent with price stability.”

Various risks to inflation outlook remain

Despite these positive signs, the BoC stated that it remains vigilant of possible risks to the inflation outlook, and is not ruling out further upward adjustments to the benchmark interest rate.

“It may still be necessary to increase the policy rate to secure further disinflation and restore price stability,” the central bank said. “Governing Council members therefore decided to reiterate that they were prepared to raise the policy rate further if needed.”

The BoC reiterated that it would be closely monitoring the development of underlying inflationary pressures, particularly when it comes to supply and demand, wage growth, corporate pricing behaviour, and inflation expectations.