Bank of Canada signals further interest rate hikes! Meeting minutes: High oil prices increase inflation risk, economic uncertainty will not hinder policy actions

According to The Smart Finance APP, minutes from the Bank of Canada's October monetary policy meeting released on Tuesday show that despite persistently high international oil prices and trade disputes with the United States creating significant uncertainty for Canada's economic outlook, policymakers believe these risks do not necessarily mean the central bank must pause its actions. If inflationary pressures persist, the Bank of Canada could still further raise interest rates.

At its October 28 policy meeting, the Bank of Canada raised its benchmark interest rate by 25 basis points to 2.5%, marking the first rate hike in more than three years. Led by Governor Tiff Macklem, the management committee reached a consensus at the meeting, indicating that it might be necessary to further increase policy rates in the future.

The meeting summary noted that policymakers fully recognized the significant uncertainty facing the Canadian economy due to high oil prices, trade tensions, and changes in the global economy, but this does not mean that monetary policy should be inactive.

The Bank of Canada stated: "The Governing Council recognizes that uncertainty does not mean inaction, but members unanimously believe caution is needed to assess how changing economic conditions will impact their outlook."

The minutes indicate that policymakers also considered keeping rates unchanged at the October meeting. The main argument for pausing rate hikes was that the recent increase in inflation was mainly concentrated in energy prices, while core inflation remained close to the Bank’s 2% target.

However, the key factor that ultimately prompted the Bank to raise rates was the ongoing Middle East conflict, which has kept international oil prices elevated, and policymakers expect this situation to last longer than previously anticipated.

The Bank of Canada pointed out that rising energy prices and their transmission to the prices of other goods and services have increased the risk that high inflation will persist and spread to broader areas of the economy. Meanwhile, the Canadian economy has shown stronger-than-expected resilience, suggesting that the dampening effect of economic weakness on price increases is fading.

The minutes state: "Rising energy prices and their transmission effects collectively increase the risk of persistent and widespread inflation. As the economy is expected to perform more robustly, the downward pressure on prices that could offset these cost pressures is also weakening."

Although policymakers differ in their views on the speed and extent of the transmission of higher energy prices to other sectors, they unanimously agree that the energy shock alone is enough to keep the Canadian Consumer Price Index (CPI) inflation rate around 3% for more than a year—well above the Bank’s 2% target.

The labor market was also a key topic of policy discussion. Data released by Statistics Canada last week showed that employment fell slightly in October and the unemployment rate unexpectedly rose to 6.7%, indicating further signs of slackening in the labor market.

The Bank of Canada's Governing Council acknowledged that the labor market as a whole remains soft, but some members believe that, given the strong job creation in the private sector, the actual labor market situation may be stronger than the aggregate employment data suggests.

At the same time, policymakers believe that there is still some degree of slack in the Canadian economy, but recent upticks in economic growth may gradually absorb surplus capacity, thus weakening economic slack’s dampening impact on inflation.

Taking all the above factors into account, the Bank of Canada believes that the risk profile facing the current economy has changed. The longer-lasting shock from energy prices, combined with the economy's demonstrated resilience, has further increased the risk of persistently high inflation spreading to a wider range of goods and services.

The Bank of Canada's next policy meeting is scheduled for December 9. Currently, pricing in the overnight index swap market suggests a roughly 50% chance that the central bank will raise rates again at that time.

This means that, even though the Canadian economy continues to be affected by trade frictions, a weak labor market, and global economic uncertainty, persistently high energy prices are making the central bank more vigilant about inflation risks. Inflation, employment, and economic growth data in the coming weeks will be important factors in determining whether the Bank of Canada raises rates again in December.