3 Things Bank of Canada Subtly Told Us About Interest Rates in March Minutes

It seems like forever ago, given the past couple of weeks. Still, the Bank of Canada made a significant policy decision on March 8, when it became the first major central bank to stop raising interest rates amid a global fight to contain inflation. Here are three things the Bank of Canada revealed in its meeting minutes that might not have been evident previously:

Powell’s Problems Aren’t Our Problems

The United States Federal Reserve made a highly anticipated decision to keep raising interest rates despite evidence that higher rates have put serious strain on the financial system. Bank of Canada governor Tiff Macklem and his deputies wondered if tight labor markets in Canada would cause them the same problems plaguing Powell and the Fed. However, they concluded that there were important differences between the two countries’ labor markets, including faster immigration rates in Canada and a stronger rebound in labor participation rates. All things equal, they reckoned a greater supply of workers should keep wages from spiraling out of control. They also observed that they must contend with a vulnerability the U.S. doesn’t have: high levels of household debt.

Investment is Key to Growth

The Bank of Canada acknowledged that investment is key to growth but noted downside risks to the outlook for business investment. A lack of confidence around trade may lead businesses to put off much-needed investments, particularly in the oil and gas sector. These risks could translate into weaker-than-expected growth and could weigh on inflation in the medium term. However, the bank believes the North American Free Trade Agreement (NAFTA) update is making progress that could improve investor confidence in Canada.

Inflation Expectations Are Well-Anchored, for Now

The Bank of Canada paid special attention to inflation expectations, which are a key determinant of future inflation because they shape how people behave today. The bank said household and business expectations for inflation are firmly anchored around the bank’s 2% target, but there were scattered signs of concern about prices and wages. The bank said it would continue to monitor these indicators closely, as it believes households and businesses sometimes overlook shifts in inflation expectations.

Related Facts

• The Bank of Canada raised its benchmark interest rate four times from mid-2017 to October 2018, pushing up the cost of borrowing for Canadians.
• Global economic growth is slowing, and central banks worldwide are starting to take a more cautious stance on raising interest rates.
• The Bank of Canada’s next interest rate announcement is scheduled for April 24, and many analysts predict the bank will once again hold the rate steady.

Key Takeaway

The Bank of Canada’s March meeting minutes reveals that the labor market and high household debt remain primary concerns for Canada’s central bank. In addition, while inflation expectations are still firmly anchored around the bank’s 2% target, risks to investment and growth are present, particularly due to concerns around trade uncertainty.

Conclusion

The Bank of Canada manages a precarious balancing act to keep the economy moving positively while avoiding the negative outcomes of unchecked inflation and a potential housing market crash. As a result, the bank’s market signals are closely watched by economists and investors alike, as its decisions hold great sway over Canada’s economic performance.