Bank of Canada officials more confident that rates are high enough, according to meeting summary

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Top officials at the Bank of Canada are growing more confident that interest rates are “sufficiently restrictive” to get inflation under control, according to a summary of the meeting that took place ahead of the bank’s early-December rate decision.

The bank’s six-person governing council, led by Governor Tiff Macklem, hasn’t ruled out further rate hikes if needed. But the meeting summary, published Wednesday, reinforces market bets that interest rates have peaked and that the next serious debate around the governing council table will be about when to begin easing monetary policy.

The summary also highlighted the bank’s growing concern over shelter price inflation, and warned that “significant and sustained increase in new home construction would be needed to resolve the long-standing structural shortage in supply.”

Over the past two years, the bank has increased its policy rate 10 times, from 0.25 per cent to 5 per cent, to reduce demand in the economy and curb inflationary pressures. Since July, it has held the benchmark rate steady over three consecutive decisions.

In October, the governing council was split, with some members believing that further rate hikes might be needed to keep inflation on a downward track, according to a summary of that month’s rate-decision meeting. By the Dec. 6 rate decision, there was more unanimity that the current level of monetary policy was working.

“Members agreed that the likelihood that monetary policy was sufficiently restrictive to achieve the inflation target had increased. But they also agreed that risks to the inflation outlook remained, and it may still be necessary to increase the policy rate to secure further disinflation and restore price stability,” the document said.

The governing council saw the October decline in core inflation measures, which strip out volatile price movements, as a “positive sign,” the summary said. But they wanted to see more than one month of data.

On Tuesday, Statistics Canada reported the annual rate of inflation was 3.1 per cent in November, the same as the month before. This was slightly higher than Bay Street analysts expected, but still just a notch above the Bank of Canada’s 1 per cent to 3 per cent control range, and far below the 2022 peak of 8.1 per cent.

The bank’s two preferred measures of core inflation also remained steady at 3.4 per cent and 3.5 per cent.

In a speech last week, Mr. Macklem said he expects inflation to be “close to” the bank’s 2-per-cent target by the end of next year, but that there could be some “bumps along the way.” He said his team won’t wait until inflation is back to target to begin cutting rates, but they do need to be confident that it is on a “sustained downward track.”

Financial markets are pricing in a roughly 85-per-cent chance that the central bank starts cutting interest rates by April, according to Refinitiv data. Many Bay Street economists think that the first rate cut could come closer to the middle of the year.

“We continue to see the Bank of Canada becoming more dovish in the new year, when policymakers will have a fresh set of forecasts in hand,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients.

“Despite the surprise in yesterday’s CPI data, inflation is still tracking below the central bank’s October projections. Bond yields haven’t moved much on the release, but the minutes do implicitly reinforce our forecast for rate cuts to begin in Q2 2024.”

The summary itself doesn’t mention rate cuts. But it does outline the governing council’s belief that supply and demand in the Canadian economy are “approaching balance” – a condition for easing monetary policy.

“Members anticipated that weakness in consumption and business investment would 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 summary said.

One clear takeaway from the document is that Canada’s top central bankers are increasingly worried about the ballooning cost of housing, which has become the biggest driver of overall inflation. In November, rent was up 7.4 per cent compared with the previous year, while mortgage interest costs, which are directly tied to the central bank’s rate hikes, were up 29.8 per cent.

Bank officials have consistently pointed to the shortage of homes in Canada as the main thing pushing up rents and preventing a fall in home prices. Deputy governor Toni Gravelle noted in a speech earlier this month that home construction has not kept pace with high levels of immigration.

“Some members expressed the view that costs related to house prices would ease as higher interest rates continued to restrain spending and weigh on the housing market,” the summary said. “Others were concerned that elevated shelter price inflation could persist or even accelerate given that it will take time for supply to catch up to demand.”

Over all, the governing council thought “monetary policy could not solve the structural shortage of supply in the housing market.” But they did caution that “if financial conditions eased prematurely, the housing market could rebound, further fuelling shelter price pressures.”

The bank’s next interest-rate decision is on Jan. 24.