BoC recap: Could the latest rate hike be followed by another?

The prospect of further monetary tightening remains open after the Bank of Canada (BoC) lifted its overnight rate by 25 basis points to 2.5%. The central bank cautioned that persistently high energy prices and a greater pass-through of costs could leave inflation elevated. While Governor Tiff Macklem indicated that another increase may be necessary, the Governing Council remains cautious and has not committed to a predetermined policy path.

Preventing sustained energy costs from feeding more widely into goods and services prices was the reason for the move, the BoC said. Although businesses have so far absorbed most of the increase in input costs, the Bank’s surveys indicate that more of these costs will be passed on over the coming year. In Macklem’s assessment, inflation is now 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 weakness in the housing market. Even following the increase, Macklem said the policy rate was insufficiently high to curb growth. Rogers, however, acknowledged that borrowing costs were already putting pressure on housing. Adding to the Bank’s challenges is substantial uncertainty surrounding trade relations with the US and the broader economic outlook.

Taken together, the signals pointed to a stance that was measured yet hawkish. Additional tightening is still a possibility should inflation driven by energy costs spread more widely or prove more persistent. Macklem nevertheless emphasised that rates have no predetermined path: each decision will be guided by the inflation outlook and incoming data.