The Zhitong Finance App learned that the minutes of the October monetary policy meeting released by the Bank of Canada on Tuesday showed that although continuing high international oil prices and trade disputes with the US have brought significant uncertainty to Canada's economic prospects, policymakers believe that these risks do not mean that the central bank must suspend action. If inflationary pressure continues, the Bank of Canada is still likely to raise interest rates further.
The Bank of Canada raised the benchmark interest rate by 25 basis points to 2.5% at the interest rate meeting on October 28. This is the first time in more than three years that the bank has raised interest rates. The management committee, led by Governor Tiff Macklem (Tiff Macklem), reached a consensus at the meeting that it may be necessary to further raise policy interest rates in the future.
The summary of the meeting minutes points out that policymakers are fully aware that high oil prices, trade frictions, and changes in the global economic situation have brought considerable uncertainty to the Canadian economy, but this does not mean that monetary policy should do nothing.
The Bank of Canada said, “The Governing Council recognizes that uncertainty does not mean inaction, but members agree that caution is needed to assess how changes in the economic situation will affect their outlook.”
Meeting minutes show that policymakers also considered keeping interest rates unchanged at the October meeting. The main reason supporting the suspension of interest rate hikes is that the recent rise in inflation is mainly concentrated in the energy price sector, while the core inflation indicator is still close to the central bank's target level of 2%.
However, the key factor that ultimately prompted the central bank to decide to raise interest rates is that international oil prices continue to be high due to the Middle East conflict, and policymakers expect that this situation may last longer than previously anticipated.
The Bank of Canada pointed out that the rise in energy prices and its transmission to the prices of other goods and services has increased the risk that inflation will continue to rise high and spread to the wider economic sector. At the same time, the Canadian economy has shown greater resilience than expected, which means that the weakening of the economy's deterrent effect on price increases is weakening.
According to the minutes of the conference, “The rise in energy prices and its transmission effects together increase the risk of continued and widespread inflation. As the economy is expected to perform more steadily, the downward price forces that can offset these cost pressures have also weakened.”
Although policymakers have different opinions on the speed and extent of the rise in energy prices being transmitted to other sectors, they agree that the energy shock alone will be enough to keep the Canadian Consumer Price Index (CPI) inflation rate at around 3% for the next year or more, which is significantly higher than the central bank's target of 2%.
The labor market is also the focus of this policy discussion. According to data released by Statistics Canada last week, the number of employed people fell slightly in October, and the unemployment rate unexpectedly rose to 6.7%, indicating signs of a further slowdown in the labor market.
The Bank of Canada Management Committee acknowledged that the overall job market is still weak, but some members believe that considering the private sector's strong job creation performance, the actual labor market situation may be more stable than the overall employment data shows.
At the same time, policymakers believe that the Canadian economy still has a certain amount of idle production capacity, but the recent recovery in economic growth is expected to gradually absorb excess supply, thereby reducing the suppressing effect of economic weakness on inflation.
Combining these factors, the Bank of Canada believes that the current pattern of risk facing the economy has changed. The prolonged energy price shock, combined with the resilience shown by the economy, has further increased the risk that high inflation will persist and spread to more goods and services.
The Bank of Canada's next interest rate meeting will be held on December 9. Currently, pricing in the overnight index swap market shows that traders expect the probability that the central bank will raise interest rates again at that time is about 50%.
This means that although the Canadian economy is still affected by trade frictions, weak job markets, and global economic uncertainty, continued high energy prices are making the central bank more wary of the risk of inflation. Inflation, employment, and economic growth data for the next few weeks will be an important basis for deciding whether the Bank of Canada will continue to raise interest rates in December.