By Pradeep Saran, September 21,2023
On September 21, the Bank of Canada released minutes from its recent policy meeting, shedding light on their decision to maintain interest rates at a 22-year high. The minutes revealed the central bank’s intention to signal that interest rates would not be lowered in the near future.
During the September 6 meeting, the Bank of Canada (BoC) chose to keep its key interest rate at 5%. They acknowledged that the economy was experiencing a period of slower growth but left room for the possibility of future rate hikes if inflationary pressures persisted.
Governor Tiff Macklem, speaking the day after the meeting, indicated that interest rates might still not be high enough to bring inflation down to the 2% target, even after implementing 10 hikes totaling 475 basis points since March of the previous year.
The minutes revealed that the BoC deliberately adopted a hawkish tone in its communications following the rate decision. This was done to prevent any misinterpretation that their decision signaled the end of policy tightening and an imminent reduction in interest rates. Instead, the governing council members agreed that they were considering either maintaining the policy rate at its current level or potentially raising it further.
The central bank stressed the persistence of core or underlying inflation, with Deputy Governor Sharon Kozicki noting that it exceeded the level consistent with achieving the 2% target. Additionally, official data released on Tuesday showed that headline inflation had increased to 4.0% in August from 3.3% in July, with two of the three core inflation measures also registering gains.
Following the release of the August inflation data, money markets began to increase their expectations of a rate hike at the next policy meeting scheduled for October 25. As of Wednesday, the markets were pricing in a 43% chance of an interest rate increase, compared to just 23% before the release of the inflation figures.
It’s worth noting that earlier in the year, the Bank of Canada had indicated a pause in rate hikes to allow previous increases to take effect. This had led money markets to anticipate potential interest rate cuts later in the year, contributing to a surge in housing prices that had previously been on the decline.