Bank of Canada felt uncertainty over rates did not mean inaction, minutes show

By Promit Mukherjee

OTTAWA, Nov 10 (Reuters) -- Ahead of the Bank of Canada's October 28 interest rate decision, governors agreed that uncertainty over the future path of rates did not mean the bank would do nothing, minutes showed on Tuesday.

The BoC hiked its key policy rate by 25 basis points to 2.5% last month for the first time in more than three years, citing higher energy prices that it said could trickle down into non-energy cost pressures. 

Members of the rate-setting governing council noted

there was considerable uncertainty on how higher energy prices and the trade war with the United States would affect inflation.

"They recognized that uncertainty did not mean inaction, but they agreed they would need to proceed carefully to assess how economic developments would affect their outlook," the minutes noted.

Canada's annual inflation rate hit 3.2% in September, above the bank's 1%-3% target range, almost solely led by higher energy and energy-related costs of transportation.

Although the closely-watched core measures were below the BoC's 2% target, "cost pressures were building and would eventually be reflected in core measures as these costs make their way into consumer prices", the minutes said.

Some economists and analysts felt the bank had hiked prematurely, concerns that became more pronounced after a third consecutive month of a dip in employment numbers.

But the BoC worried that the longer energy costs stay higher, the more likely the chances that they would pass through into the broader economy.

Governing council agreed that even without a pass-through, the energy shock alone would keep inflation at around 3% for more than a year, the summary of their meeting said.

"Businesses were also facing higher costs from non-energy imports," it said, adding that these costs would eventually pass through to consumer prices. 

With the pandemic experience still fresh in the minds of people, the members noted that expectations for inflation may have become more sensitive to recent price changes. 

"Near-term inflation expectations had moved up," the deliberations said, adding that higher policy interest rate was needed to mitigate the risk that higher energy costs would spread to other goods and services.  

(Reporting by Promit Mukherjee, editing by David Ljunggren)

((Reuters Ottawa editorial; [e-mail]))

Keywords: CANADA CENBANK/