The Bank of Canada’s Governing Council considered holding its policy rate at 2.25 percent or raising it by 25 basis points at the October 28 meeting, and agreed the decision would be a close call, according to the summary of deliberations the Bank published on Tuesday. Members settled on the increase, to 2.50 percent, judging that inflation was expected to remain close to 3 percent in the coming months and that underlying price pressures were not easing as quickly as expected.
Members who favoured holding pointed to an economy operating with excess capacity and a weakening labour market. The unemployment rate was 7.1 percent in September, up 0.2 percentage points from June, employment fell in September after small increases, and the job openings rate had fallen to 2.6 percent. The summary records that the output gap had moved further into negative territory and that slack was continuing to build, after GDP fell 1.7 percent in the second quarter. Those members also noted that inflation excluding energy and food had declined and that wage growth had slowed.
Members who favoured raising the rate argued that inflation could stay above the 2 percent target for longer than expected. Core inflation, measured by CPI-median and CPI-trim, was 2.7 percent in September, and headline CPI inflation was 2.4 percent, up from 1.9 percent in August, with the increase driven by gasoline prices, which rose 6.5 percent year over year in September after falling 1.4 percent in August. Brent crude was around 70 US dollars a barrel, well above the levels assumed in the July Monetary Policy Report. The hike case also rested on doubt about the slack estimates themselves: the economy might not have as much excess capacity as some estimates suggested.
The agreed wording was that raising the rate was the most appropriate course given the persistent inflationary pressures, and that the increase signalled that underlying pressures needed to moderate and that the Bank was committed to restoring inflation to the 2 percent target in a timely manner. The summary records no vote count and attributes no position to any individual member.
On the path ahead, the summary makes no commitment to further increases and contains no discussion of the neutral rate. Members acknowledged considerable uncertainty about developments outside Canada and their effects at home, agreed that uncertainty did not mean inaction, and agreed they would need to proceed carefully. Further increases were discussed only as a contingency, required if inflation stayed above target for an extended period or if inflation expectations became unanchored. The Bank’s next decision is December 9.