Bank of Canada Summary of Deliberations: Economy Still in Excess Demand

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By Ketki Saxena 

Investing.com — The Bank of Canada has released its Summary of Deliberations for its monetary policy decision on March 8., explaining its decision to hold its policy rate steady. 

In the Summary, the bank  noted that “economic data and developments since the January MPR did not materially change the Bank’s most recent outlook: the economy is slowing, and inflation is coming down.” 

The minutes however reiterated that the economy still remains in excess demand, labour markets remain too hot, and wage growth continues to remain inconsistent with bringing inflation back to target. 

In terms of the economy, while growth slowed to 0% in Q2 2022, January GDP grew 0.3%, leading the Governing Council to conclude “that growth in early 2023 may be a bit stronger than the Bank had forecast in its January MPR.”

While “slowing growth in final demand was beginning to improve the balance between demand and supply, but the economy remained in excess demand”. 

Regarding employment, the Governing Council acknowledged that “labour market remained very tight and was still operating above maximum sustainable levels. While the Bank had expected to see some easing in labour market conditions, recent data suggest that the degree of tightness has not substantially changed over the past six months. “

The minutes further noted that “Wage gains have remained in the range of 4% to 5%. Governing Council members agreed that the current pace of wage growth was not consistent with getting inflation back to 2% unless it were accompanied by an increase in productivity growth to well above its historical trend.”

On the whole, the Bank of Canada does not appear to believe that monetary policy is sufficiently restrictive. 

The minutes noted “Short-term inflation expectations are higher than in the Bank’s own inflation forecast. If they do not come down, high inflation will be stickier than expected.” 

While the Bank reiterated the continued adherence to its “conditional pause”, it explained that the pause is  “An opportunity to learn whether interest rates had increased enough to return inflation to the 2% target” after putting “a great deal of tightening in place in a very short period and will need a further accumulation of data over time to see whether the expected impact on inflation and growth materializes along the lines of the January outlook.”

The minutes also acknowledged the danger of continuing to tighten until the impact of monetary policy moves so far had become clearer. The Bank noted that the downside of such a move would  be that “durable goods prices could fall if businesses find themselves overstocked. As well, household spending may be more sensitive to higher interest rates than the Bank has estimated because of elevated levels of household debt.”