Bank of Canada thought about another rate hike before its previous meeting

According to the central bank’s summary of deliberations, it was considering another interest rate hike for its previous meeting, as it was afraid that too slow a reaction could support inflation growth.

It turns out the governing council was thinking about one more rate increase. The main reasons for that were resilient economic growth, potential difficulties with bringing inflation down from 3% to 2%, and the risk of waiting too long to react to strong inflation.

Although the Bank of Canada seems sure that inflation will go down to 3% by the middle of this year, it’s still worried by the fact that the return to 2% could take longer as the cost of services is still too high.

In the end, the BoC kept its key lending rate at 4.5% on April 12 and decided to wait for more economic data in order to determine the future of the rates.

“Governing council agreed to keep the rate unchanged and keep assessing whether monetary policy is sufficient for returning inflation back to the target level of 2%,” – the Bank noted.

Earlier this year, the central bank decided to pause its aggressive rate-increasing cycle, saying it doesn’t expect to raise rates again, unless inflation and the economy show hotter-than-expected results.

Although the potential difficulties didn’t make the Bank change its mind, it still left the possibility of more rate hikes and warned that Canadians shouldn’t expect rate cuts in 2023.

Such a decision came amid the economy showing stronger-than-expected numbers. And that’s in spite of the fact that the Bank’s overnight rate is at its highest level since 2007, raising borrowing costs for Canadians and businesses.

Following zero growth in Q4, the national economy seems to be recovering in the first quarter. According to Statistics Canada, real gross domestic product was up by 0.5% in January and a preliminary estimate suggests 0.3% growth in February.

The job market is also strong, with firms continuing to hire. Last month, Canada’s unemployment rate was still at almost the record low level of 5%.

While the jobs added lately may seem puzzling, economists believe that strong population growth can explain the strong performance partially.

The BoC also pointed to that in its report.

“In this context, the hot hiring results are probably not surprising: with faster population growth, employment growth may be stronger than the historical tendency without tightening the labour market,” the Bank added.