BoC’s Meeting Minutes suggest rate cuts not the most likely scenario

The Summary of Deliberations from the April 12 meeting of the Bank of Canada, at which the interest rate was left steady, revealed that they debated raising rates. According to the projections of the BoC Governing Council, the document notes that inflation was dropping. Officials concurred that expecting rate reductions later in 2023 is not the most likely outcome.

After the minutes, the USD/CAD pair dropped modestly after the minutes fell below 1.3620. It is flat for the day after surging on Tuesday from 1.3545 to 1.3647, reaching the highest level in a month. The meeting minutes stated that although the latest economic prediction was identical to the one from January, “Governing Council agreed that there was a sense that the economy was proving to be a little stronger than expected.” Members expressed worry that the present rate of wage growth does not permit inflation to return to 2% without a significant rise in productivity.

Members agreed that it was important to continue to signal that the central bank is prepared to tighten policy further if needed.

Key quotes:

“Governing Council noted that while global economic growth remained subdued, it was again coming in stronger than expected, particularly in the euro area and the United States.”

“Governing Council assessed recent data and developments in Canada and judged them to be evolving broadly in line with their January projection. Headline inflation was coming down, and signs of a rebalancing of supply and demand were becoming evident. But Governing Council acknowledged that the labour market was still tight and the slowing in growth would likely come a little later.”

“Members of Governing Council revisited their concern that the current pace of wage growth, if sustained, would not be consistent with getting inflation back to 2% without a substantial increase in productivity (which has been declining in recent quarters).”

“Governing Council agreed that, overall, consumer spending is anticipated to be subdued in the second half of 2023 and into 2024 as the effects of the tightening in monetary policy work their way through the economy.”

“Governing Council was more confident that inflation in Canada would continue to fall in the coming months to around 3%, the second stage of disinflation all the way back to 2% could prove more difficult.”

“Members agreed that while a risk of a sharper slowdown remains, based on their current outlook, cutting rates later this year did not seem to be the most likely scenario.”

“The discussion around increasing the interest rate further focused on whether monetary policy was restrictive enough and whether it was best to raise the policy rate now or wait for more evidence.”