Bank of Canada's First Ever Summary of Deliberations: Terminal Rate Likely Reached

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By Ketki Saxena 

Investing.com – Earlier today, the Bank of Canada released its first-ever Summary of Deliberations - essentially meeting minutes - that outlined views of the BoC’s governing council prior to its last monetary policy announcement in late January at which the Canadian central bank raised its benchmark interest rate 25 bps and signaled a conditional pause. 

Prior to today, the Bank of Canada remained in the minority of its central bank peers by not publishing most monetary announcement meeting minutes. 

However, the BoC has now changed its approach following a call from greater transparency from the International Monetary Fund last year. 

While the Summary of Deliberations largely reiterated comments we have been previously privy to, some new pieces of information were offered - for example, the revelation that the BoC did in fact consider holding interest rates at their current level in January. 

In the document, the BoC noted that “The case for leaving the policy rate at 4.25% was that developments with respect to both the economy and inflation were beginning to move in the right direction and that policy had been forceful and just needed more time to do its work”. 

Royce Mendes, head of macro strategy at Desjardins Capital Markets, noted that this piece of information is critical, and “suggests a more dovish tilt among governing council members than was previously appreciated.”

Ultimately however, the Bank of Canada did decide to err on the side of caution when it comes to inflation and raise the interest rate. 

"The case for raising the rate by an additional 25 basis points was twofold”: firstly, continued strength in the economy reflected in still tight labour markets, and better than expected 3rd quarter GDP growth in 2023.  Q4 economic activity is also likely to come in above the Bank of Canada’s forecast. 

The document noted, "In other words, data on both the labour market and economic activity suggested that there was more excess demand in the economy in the fourth quarter of 2022 than previously forecast.”

The second reason for the move was that the Canadian Central Bank - having dragged its feet on tackling “transitory” inflation in Q1 2023 - now prefers to err on the upside when it comes to inflation becoming entrenched. 

In its Summary of Deliberations, the BoC noted that “Given inflation was still well above the target, Governing Council continued to be more concerned about upside risks” and that "Putting in place some additional tightening now could help insure against that outcome.”

The Bank also elucidated the rationale behind its conditional pause. 

"Members were in broad agreement that, going forward, it would be appropriate to pause any additional tightening to allow economic developments to unfold. The Bank had been forceful to date in tightening monetary policy, and the full impact was still to come. In addition, there were enough “green shoots” of progress. 

“Allowing time for further progress to occur would recognize the lags in the transmission of monetary policy and balance the risk of over- versus under-tightening.”

The Summary also highlighted the three key indicators the council will be watching to make more “data dependent” decisions: how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding

Importantly, the Summary highlighted that “the bar for additional rate increases was now higher”, although the BoC did reiterate that it would “raise the policy rate further if these upside risks materialized”. 

Overall, the key new information to come out of the BoC’s first ever meeting minutes indicates that the “conditional pause” it previously (under)stated is more likely than not to be a permanent pause. 

 Andrew Kelvin, Toronto-Dominion Bank’s chief Canada strategist commented, “The minutes do suggest that a rate hike in March is exceedingly unlikely, and even if data remains strong we doubt that the bank would feel it has enough evidence to move rates in April either”

“We continue to look for the BoC to remain on hold until January, 2024, at which point we expect rate cuts.”