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Bank of Canada officials were concerned that inflation could get “stuck” above 2 per cent even as they voted to keep the bank’s benchmark rate unchanged earlier this month, according to a summary of the rate decision deliberations.

By holding its key rate steady at 4.5 per cent on March 8, it became the first major central bank to pause monetary policy tightening this year.

After eight consecutive rate hikes, the bank’s governing council was “comfortable” with their forecast “that inflation will continue to ease this year as monetary policy tightening works its way through the economy and base-year effects pull down 12-month rates of inflation,” the summary said.

“However, they remain concerned about the risk that inflation could get stuck materially above the 2 per cent target.”

Central bank officials have said the pause in rate hikes is “conditional” and they are prepared to raise interest rates again if inflation does not come down as rapidly as expected.

The summary, published Wednesday, provides a snapshot of the Bank of Canada’s recent thinking about the economy. However, it may already be out of date. Two days after the rate decision, California-based Silicon Valley Bank failed, followed by the collapse of two other regional U.S. banks, sparking the biggest global banking crisis since 2008. And last weekend, Swiss banking giant Credit Suisse was forced into an emergency merger with UBS Group.

Financial sector turmoil has changed the outlook for central banks. The U.S. Federal Reserve and the Swiss National Bank pumped billions of dollars of liquidity into their respective banking systems last week to forestall bank failures. The Bank of Canada and other central banks have enhanced their currency swap lines – a move aimed at keeping U.S. dollars flowing through the global financial system in the event of a liquidity crunch.

Markets have calmed down in recent days. But even if the turmoil blows over, the economic outlook has darkened since the March 8 rate decision. Financial sector concerns tend to seep into the broader economy, as banks tighten their lending standards and consumers get nervous.

Before the recent upheaval, Canada’s central bankers were weighing competing economic signals. GDP growth slowed more than expected in the fourth quarter, but Canada’s labour market remained surprisingly tight, with unemployment still near a record low and wages continuing to grow quickly.

The governing council members “agreed that the labour market remained very tight and was still operating above maximum sustainable levels,” the summary said.

Alongside a cooling in the labour market, members of the governing council are looking for a decline in short-term inflation expectations and core inflation measures.

“As well, competitive pressures need to return to normal to make businesses cautious about passing on higher input costs to final goods prices. That will require a better balance between demand and supply, so businesses worry more about losing customers if they increase prices,” the summary said.

Inflation is decelerating faster than expected. On Tuesday, Statistics Canada reported that the Consumer Price Index rose 5.2 per cent year-over-year in February, down from 5.9 per cent in January and below Bay Street estimates of 5.4 per cent.

The central bank expects inflation to fall to about 3 per cent by the middle of the year and return to its 2-per-cent target by the end of 2024.

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