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The Bank of Canada’s Governing Council believes it’s too early to say when they can start easing interest rates, according to a summary of deliberations from its January 24 meeting.

While they haven’t ruled out further rate increases in the event of inflationary surprises, the six-member council also believes that future rate decisions will focus on how long to maintain the policy rate at its current level of 5.00% in order to keep inflation trending down.

“They recognized that, based on the information that was available, it was difficult to foresee when it would be appropriate to begin cutting interest rates,” the summary reads.

“While members did not want to make economic conditions more painful than necessary, they were particularly concerned about the persistence of inflation and did not want to lower interest rates prematurely, only to have to raise them again to get inflation back to the 2% target,” it continued.

During their January monetary policy meeting, in which they opted to leave the key benchmark rate unchanged, members said they expect the economy to remain weak “in the near term,” which they expect will continue to alleviate inflationary pressures.

The headline Consumer Price Index (CPI) inflation rate has since fallen from a high of 8.1% in June 2022 to its current rate of 3.4%. Despite the progress, along with an easing of short-term inflation expectations, council members remain concerned about underlying inflation.

BoC concerned about the impact of housing costs on inflation

The Bank of Canada has recently expressed more direct and explicit concerns regarding the significant impact of rising shelter costs on the overall inflation rate.

The topic was discussed again at its January 24 meeting, where members “expressed concern” that shelter price inflation would continue to keep overall inflation elevated.

“They discussed the risk that if the housing market rebounded more than expected in the spring of 2024, shelter inflation could keep CPI inflation materially above the target even while price pressures in other parts of the economy abated,” the summary reads.

The council also said it expects residential real estate activity to “pick up” in early 2024, though housing resale activity is still expected to remain weak.

High shelter costs to contribute to weak economic growth

Additionally, high costs for both homeowners and renters are expected to keep economic growth muted in the near term.

“Households will be renewing mortgages in 2024 at a higher interest rate, which will lower the amount of disposable income they have to spend on other goods and services,” the summary said, adding that renters who are also struggling with rising costs are “curtailing” their spending.

“While still below pre-pandemic levels overall, measures of financial stress had continued to edge up in recent months, particularly delinquency rates for non-mortgage debt,” the members noted.

Although the BoC says the Canadian economy has essentially “stalled” since the middle of 2023, it still sees some indicators that it remains in “modest excess supply.”

In its latest economic forecasts released in the January Monetary Policy Report, the Bank revised down its GDP growth forecasts, which it expects will be 1% for 2023 and 0.8% in 2024.

Going forward, the Bank’s Governing Council members said they will be closely monitoring key indicators, including the balance of supply and demand in the economy, corporate pricing behaviour, inflation expectations and wage growth relative to productivity.

Featured image: DAVE CHAN/AFP via Getty Images

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