The Bank of Canada provided additional insight on how it will approach interest-rate decisions over the months ahead, informing an emerging debate over whether the central bank has been too cautious in lowering borrowing costs.
Governor Tiff Macklem’s decision to cut the benchmark rate a quarter point on Sept. 4 was guided by a scenario analysis, according to a summary of those deliberations, published Wednesday after the customary lag.
Now that those scenarios are public, they could help traders and investors anticipate whether the Bank of Canada will follow the Federal Reserve and cut interest rates by a half point next month.
Scenario one: Lower interest rates ignite a faster-than-expected rebound, stoking price pressures and complicating efforts to get inflation back to target. The housing market takes off, boosting home prices and other shelter costs. Wage growth, already at a pace the Bank of Canada considers inflationary, stays high and continues to put upward pressure on the cost of services. “In this scenario, it may be appropriate to slow the pace of further cuts,” the central bank said.
Scenario two: Early indications that the economy slowed this summer prove true, and the labour market continues to weaken amid ongoing slumps in consumption and residential investment. At the same time, businesses hold back on investment, given tepid international and domestic demand. “In such a scenario, it may be appropriate to lower the policy rate more quickly,” the bank said.
How to read the tea leaves: Neither scenario is a roadmap, but combined, they shed more light on what policymakers will be thinking about ahead of the Oct. 23 interest-rate announcement.
Statistics Canada reported Tuesday that headline inflation dropped to the Bank of Canada’s target of two per cent, reducing the risk of the first scenario becoming reality. Housing sales remained sluggish over the summer, despite a couple of interest rate cuts. Will a third make a difference? Real estate indicators this fall could carry more weight than usual.
Home prices could simply be too high, especially as the jobless rate continues to climb. The inflation report contained lots of evidence of weak demand, recording widespread declines in the price of goods. Clothing and footwear dropped in August for the first time since 1971, suggesting that parents spent less to outfit their children for the new school year.
Carolyn Rogers, the Bank of Canada’s senior deputy governor, said yesterday that there was “still work to do” on inflation. Maybe. But keep a close eye on hiring and investment data. There could be work to do on reviving the economy, too.
