The Bank of Canada headquarters in Ottawa, on June 1. The Bank of Canada published its summary of deliberations for its latest interest rate decision on Wednesday.Adrian Wyld/The Canadian Press
The Bank of Canada’s summary of its most recent interest rate decision has delivered the strongest signal yet that the central bank still isn’t convinced rates are high enough – and that it may already have one foot in rate-hike camp for its next decision in July.
The document released Wednesday – reviewing the internal discussions that led to the June 7 rate increase of one-quarter of a percentage point, to 4.75 per cent – makes it abundantly clear that the “surprising” resilience of consumer demand has become a key worry for the bank in its inflation fight. It was a central factor among the “accumulation of evidence” that convinced the policy-setting Governing Council to resume rate hikes two weeks ago, ending a four-month pause.
The only real debate for the council was whether to raise the rate immediately, or wait until the next decision date in July while forewarning that another rate hike was likely coming. The summary reveals that the council decided it was best to act right away with a June hike, and to “assess the need for further policy rate increases based on the incoming [economic] data.”
That quotation – just a fraction of one sentence in the six-page document – is, nevertheless, critical evidence of the Bank of Canada’s approach as it looks ahead to its next rate decision, on July 12. It suggests that another rate hike will not only be on the table, but it will be right in the middle, where it will get a good, hard look.
It’s notably stronger than the language the bank chose for the June 7 rate announcement itself, when it said only that the Governing Council “will continue to assess the dynamics of core inflation and the outlook for CPI inflation.”
The choice of words in the summary of deliberations much more closely resembles what that bank was saying last December, when it raised the policy rate by a half percentage point and had not yet talked about moving to the sidelines. That was followed by one more increase, in January, at which time the bank signalled that it was prepared to take a break beginning in March.
If the Bank of Canada’s choice of words has any meaning – and it almost always does – then it looks as if the bank has rewound to roughly the policy stance it had six months ago. Which is to say, approaching the end of rate hikes, but anticipating that it’s not quite done.
This is more insight than we have usually been able to parse from the summary of deliberations – a new communications product that the bank launched early this year, to provide greater transparency into its rate decisions. Past summaries have largely been rehashes of information the bank had already communicated. While there was plenty of rehashing in the June 7 summary, too, the document does provide at least some new insights into the bank’s decision to change direction and restart rate hikes.
One particularly interesting discussion in the summary is the governing council’s introspection about whether the impact of last year’s rapid rate increases on consumer demand has not so much been inadequate – as further rate increases would imply – but, rather, unusually delayed.
Governing council kicked around the ideas that the COVID-19 pandemic created an unusually large amount of pent-up demand for services, and that improvements in supply chains have unlocked demand for goods. It considered that excess savings from the pandemic, together with unusually strong labour markets, have “mitigated” the effect of soaring borrowing costs. It mused that strong population growth has helped sustain demand.
But ultimately, the council – which is made up of Bank of Canada Governor Tiff Macklem and his deputy governors – decided that regardless of those possible explanations, demand is too strong, and that’s feeding more inflationary pressure than the bank can tolerate. The council wasn’t prepared to wait and see whether the anticipated effects of past rate hikes would eventually take hold.
“Members were of the view that with the resurgence in household spending growth, the pickup in consumer confidence, and the slowing in disinflationary momentum, monetary policy did not look to be sufficiently restrictive,” the bank said.
That sentence may provide a guide for what the bank will focus on as it considers whether to raise rates by another quarter-point in three weeks time. It will likely want evidence that consumers’ appetites are waning, and that the inflation numbers are back on course, before declaring its next truce on interest rates.
On that front, the data for Canadian retail sales – released a few hours before the summary of deliberations – lend support to a July hike. Sales jumped a bigger-than-expected 1.1 per cent in April, and the gains were widespread, evidence of broad strength in consumer demand.
Next Tuesday, Statistics Canada will publish its May consumer price index report, which will provide critical insights into the path of inflation. It’s reasonable to assume that if those data don’t show substantial evidence of easing inflation pressures – especially in the trend in core inflation – the Bank of Canada will be leaning pretty emphatically toward a July rate hike.