2023-09-20 18:21:24
Those hoping for an imminent drop in interest rates will be disappointed, because the Bank of Canada is considering only two possibilities: maintaining or increasing the director.
This is what the minutes of the central bank leaders’ discussions which led to maintaining the key rate at 5% on September 6 reveal.
By deciding to pause the rise in interest rates, monetary authorities were concerned that this decision “would be wrongly interpreted as a sign that monetary tightening was over and that interest rate cuts would follow shortly.” term “.
Some economists have in fact interpreted this pause as the end of the increases and expressed the opinion that the next move by the Bank of Canada would be a rate cut, which might occur at the beginning of 2024.
This is not at all in the cards, indicates the summary of the discussions of the bank’s board of directors published on Wednesday.
On the contrary, the monetary authorities are “determined not to raise expectations in this direction, since maintaining or increasing the key rate were the only possibilities considered”.
In fact, the management of the Bank of Canada finds the lack of progress on the side of fundamental inflation to be “very concerning”. This may mean that monetary policy is not restrictive enough, she believes, or, in other words, that further rate increases are necessary to bring the inflation target back to 2%.
Since it decided to maintain its key rate at 5%, the Bank of Canada has received the portrait of inflation for the month of August, which is even more worrying. The overall inflation rate increased more than expected, from 3.3% in July to 4%. Above all, measures of core inflation, stripped of the most volatile elements like gasoline, continue to rise, which is of great concern to monetary authorities.
Encouraging signs have nevertheless appeared in the labor market, which is less tense, and in food prices, whose growth is slowing, observes the Bank.
A temporary setback?
The Canadian economy contracted by 0.2% in the second quarter, while the Bank of Canada had instead forecast growth of 1.5%. This decline is interpreted by central bank leaders as an effect of successive increases in interest rates. But it can also be explained by other factors, such as forest fires and public sector strikes, which helped reduce growth.
The fires that ravaged the country from coast to coast have affected the oil, mining and gas sector, and reduced economic growth by 0.5%, the central bank estimates. Likewise, strikes in the public sector would have reduced growth by 0.25%.
Between now and its next decision, on October 25, the Bank of Canada’s board of directors will particularly monitor wage growth, which is still incompatible with the return of inflation to the 2% target, and the better-than-expected performance of the American economy, which might have the effect of stimulating the Canadian economy.
At the end of these discussions that began on August 31, in which Governor Tiff Macklem and Deputy Governors Carolyn Rogers, Toni Gravelle, Sharon Kozicki, Nicolas Vincent and Rhys Mendes participated, it was decided on September 6 to maintain the key rate to 5%, while clearly emphasizing the lack of progress on the inflation front and emphasizing the likelihood of further increases to come if necessary.
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