Central bank outlines impact of robust GDP growth on its January decision
A combination of labour-market robustness and strong economic growth pushed the Bank of Canada to hike its benchmark interest rate to 4.5% in January, according to the central bank’s first-ever publicly released minutes of its policy meeting.
Surprisingly strong job gains over the past few months indicated that tightness in the Canadian labour market persisted, the BoC said.
“Governing Council viewed this as a symptom of an economy still in excess demand,” the central bank said. “Council concluded that wage momentum was plateauing in the range of 4% to 5%. Persistent wage growth in this range was not viewed as consistent with achieving the 2% inflation target unless productivity increases to well above its historical trend.”
While inflation has already receded from its peak in many top global economies, Canada posted larger-than-expected 2.9% growth in Q3 2022, mainly due to commodity exports offsetting weaker household spending and housing activity.
“Data to date suggested that GDP growth in the fourth quarter was also likely to come in somewhat higher than the bank had previously projected,” the BoC said. “So, while the economy was certainly slowing, there was more excess demand than expected.”
The consumer price index stood at 6.3% in December, down from the peak of 8.1% in summer 2022. The central bank is expecting CPI inflation to slow down to 3% by mid-2023, and then reach the 2% target in 2024.
The BoC added that continued strong immigration — and the resulting household formation — would support housing market fundamentals, counteracting the risk of policy slowing down the market to unsustainable levels.
“Expectations of future monetary policy easing could also spur buyers to re-enter the market,” the central bank said.
What’s in store for future rate hikes?
The BoC reiterated that it would be “appropriate” to pause its hiking campaign to allow economic developments to unfold in this new environment.
“The bank had been forceful to date in tightening monetary policy, and the full impact was still to come,” it said. “In addition, there were enough ‘green shoots’ of progress. Allowing time for further progress to occur would recognize the lags in the transmission of monetary policy and balance the risk of over- versus under-tightening.”
The central bank also said that it will continue with its quantitative tightening program by allowing maturing bonds to roll off.