The Bank of Canada is currently considering the possibility of raising interest rates in Canada. This decision is pending, as their governing council is divided on whether rates should increase.
Today, the central bank shared a summary of their discussions. This document outlines the conversations among the governing council members leading to the rate decision on October 25th.
In October, the Bank of Canada decided to keep its benchmark interest rate in Canada steady at five percent. That marked the second time the central bank has made this choice.
It appears to be a sign that they might be moving to the sidelines, having increased the borrowing cost ten times since last year.
When determining whether interest rates in Canada are sufficiently high, the summary of deliberations suggests a difference of opinions among the governing council members.
According to the summary, there are differing opinions within the council. Some members believe it’s probable that the policy rate should rise to reach the inflation target.
In contrast, others think maintaining a five percent interest rate in Canada for an extended period might be enough to achieve the two percent inflation target.
In the end, the Bank of Canada chose to be patient. However, the governing council members have agreed to review the need for further rate increases.
Inflation challenges amid rising Interest rates in Canada
In September, Canada’s inflation rate dropped to 3.8 percent. However, the fundamental factors contributing to price increases have not significantly diminished in recent months.
The central bank points out that core inflation measures, which exclude unstable price fluctuations, have consistently stayed within the 3.5 to 4.0 percent range over the past year.
The Bank of Canada’s governing council pointed to factors, including the increasing cost of housing, as the reasons behind the ongoing high inflation.
The central bank has been raising interest rates in Canada. This has led to higher mortgage costs for Canadians.
Housing market challenges persist despite rising Interest rates
On the other hand, the central bank has recently pointed out that other housing-related expenses are still high. This is mainly because of problems in the housing market. Now, let’s delve into this matter further.
According to the central bank, the increase in interest rates in Canada usually pushes down house prices and related expenses like upkeep, taxes, and insurance.
This information sheds light on the potential effects of higher interest rates on housing costs.
Nonetheless, the continuous housing shortage in the economy is keeping house prices high.
Moreover, the rapid growth in Canada’s population has worsened the gap between housing demand and supply. This situation explains the persistent challenges in the housing market.
The shift in corporate pricing behavior fuels inflation concerns
In a statement last week, Tiff Macklem, the head of the Bank of Canada, mentioned that companies have traditionally hesitated to increase their prices to avoid losing customers.
However, the current high inflation has made them more willing to raise prices, as they believe consumers are less likely to stop spending.
Again, addressing a parliamentary committee in Ottawa this week, Tiff Macklem informed lawmakers that they observed a concerning new pattern emerging from the corporate sector.
Macklem explained that in recent decades, whenever businesses experienced an increase in their input costs, they tended to be cautious about passing those costs on to the prices of their products and services. That includes expenses like raw materials, energy, and labor.
Corporations have shown an unusual willingness to increase their prices recently, shifting more of the responsibility for high inflation onto consumers.
This might not be unexpected for consumers who have been making day-to-day expenses. However, even the Bank of Canada is beginning to acknowledge this trend as they work diligently to control and reduce inflation.