Minutes released on November 10 show Bank of Canada governors agreed before their October 28 decision that uncertainty over the path of rates did not mean doing nothing. The bank raised its key rate to 2.5% on higher energy prices, though some economists felt the move came too early.
Governors at the Bank of Canada agreed that uncertainty over the future path of rates did not mean the bank would do nothing, according to minutes released on Tuesday. The governors reached that view ahead of the bank's October 28 interest rate decision, and they agreed they would need to proceed carefully.
Energy prices drive the first hike in over three years
The BoC raised its key policy rate by 25 basis points to 2.5% last month, its first rate hike in more than three years. The bank cited higher energy prices that it said could trickle down into non-energy cost pressures.
Members of the governing council noted considerable uncertainty on how higher energy prices and the trade war with the United States would affect inflation. Even without a pass-through, the energy shock alone would keep inflation at around 3% for more than a year, the summary said.
Inflation runs above target
Canada's annual inflation rate hit 3.2% in September, above the bank's 1%-3% target range. Higher energy and energy-related costs of transportation almost solely led the increase.
Core measures were below the BoC's 2% target. Even so, the minutes said cost pressures were building and would eventually show up in core measures as the costs make their way into consumer prices. Businesses were also facing higher costs from non-energy imports, which would eventually pass through to consumer prices, the minutes added.
Critics say the bank moved too soon
Some economists and analysts felt the bank had hiked prematurely. Those concerns became more pronounced after a third consecutive month of a dip in employment numbers.
But the BoC worried that the longer energy costs stay higher, the more likely they would pass through into the broader economy. With the pandemic experience still fresh in people's minds, members noted that inflation expectations may have become more sensitive to recent price changes. According to the minutes: "Near-term inflation expectations had moved up."
Source: Reuters via Investing.com
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