BoC Warns of Increasing Risk of Inflation Falling Below 2% Due to High Rates, Analysis Indicates
Some members of the Bank of Canada’s governing council are becoming increasingly worried that high interest rates could lead to a more significant drop in inflation than necessary.
The central bank’s summary of discussions released on Wednesday provides insight into the council’s talks leading up to the interest rate cut on Sept. 4.
According to the summary, some members believed that the risks were balanced, with strong inflation in shelter and services prices offsetting the downward pressure from excess supply.
“Some members had started to show more concern about the potential downside risks to inflation, especially if the economy and labor market weakened further.”
The summary was released a day after Statistics Canada reported that inflation had reached two percent last month, meeting the Bank of Canada’s target for the first time.
Forecasters are preparing for the possibility of larger interest rate cuts in the coming months due to significant progress in controlling inflation.
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The summary reiterates that the central bank is prepared to adjust the pace of rate cuts depending on how inflation progresses.
Although housing remains a significant contributor to inflation, the summary highlighted a slowdown in shelter price growth and decreased risks of it picking up speed again.
“Nonetheless, members noted that the housing market could still rebound faster than expected,” the summary states.
CIBC predicts that the Bank of Canada will reduce its current key interest rate of 4.25 percent by two percentage points by the middle of next year, including two half-point cuts.
The Bank of Canada’s next rate announcement is scheduled for Oct. 23.
