Bank of Canada More Concerned About Inflation Than Speeches Imply

Canada’s central bank projected an “everything is under control” attitude at last month’s announcement. The Bank of Canada (BoC) governor even shifted the conversation from threatening rate hikes, to discussing when the next cuts are coming. All of that confidence was absent from the Governing Council’s summary of deliberations. The notes show the council is growing increasingly concerned that inflation isn’t cooling nearly as fast as the economy. They warn that more than half of the inflation index is still growing significantly faster than the target. An issue that might disappoint the public, potentially extending the length that higher rates stick around. 

Canadian Economy Weakening, To Help Slow Inflation

The BoC shares concerns with most analysts when it comes to slowing economic growth. Their deliberations specifically mention negative per capita GDP growth persisting over four quarters. They also note job vacancies resemble pre-pandemic days, declining residential construction activity, and slowing consumer spending. In the next few months, they anticipate the slowdown in spending will get worse as the economy continues to drag.  

All of these signs typically point towards lower inflation. The cut to interest rates was designed to stimulate borrowing, and raise the consumption of goods faster than production can scale, thus boosting the economy and creating inflation. Raising rates was designed to reverse that exact issue—revert the economy to its old pace, as well as slow price growth. The last part appears to be happening slower than they had hoped. 

Bank of Canada Fears Inflation Is Progressing Too Slow 

The BoC is concerned the slowdown hasn’t brought inflation lower already. Headline CPI ended the year at 3.4%, while core inflation measures remained between 3.5% and 4.0% by year-end. The later numbers seek to minimize volatility in the index, making it even more concerning that it remains elevated.  

Council didn’t just take this as a sign of elevated broad-based inflation. The deliberation notes explicitly state they’re concerned that more than half of CPI items are growing at least 3%, a full point above their target growth rate.  

The probability of rate hikes to deal with this issue is slim. It may delay rate cuts until the central bank sees core inflation fall into its tolerance range of less than 3% annual growth. With more than half of components above that target rate, it’s unlikely to be a fast correction. 

Canada’s central bank is making progress on inflation but the last mile is sticky. It’s an issue they previously mentioned, though the deliberations present it like a newly-discovered issue. It’s almost like they’re surprised the fallout from the largest monetary expansion in Canadian history wasn’t resolved after just a few months.

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