BoC recap: Rates rise, with a further increase on the horizon?

A 25 basis point increase took the Bank of Canada’s (BoC) overnight rate to 2.5%, as the Bank warned that persistently high energy prices and greater pass-through of costs could prolong elevated inflation. While Governor Tiff Macklem said a further rise may be necessary, the Governing Council remains cautious and has committed to no predetermined course.

Limiting the risk of sustained energy costs feeding more widely into goods and services prices was the reason for the move, the BoC said. Although businesses have absorbed much of the increase in input costs to date, the Bank’s surveys indicate that more will be passed on over the next year. According to Macklem, inflation now appears less likely to stay well contained, even as longer-term expectations remain anchored.

The decision was made more difficult by evidence of excess supply and housing market weakness. Despite the increase, Macklem said the policy rate remained too low to hold back growth. Rogers, however, acknowledged that borrowing costs were already putting pressure on housing. Substantial uncertainty also surrounds the Bank’s outlook for the wider economy and trade relations with the US.

Taken together, the Bank’s signals were hawkish, though restrained. Additional tightening is still a possibility should energy-led inflation spread more widely or prove more persistent. Macklem nevertheless emphasised that rates are not on a preset course: the inflation outlook and newly available data will guide each decision.