By Steve Scherer and David Ljunggren
OTTAWA, March 22 (Reuters) – The Bank of Canada was concerned about inflation sticking above its 2% target and agreed there might be a need to tighten monetary policy further when officials decided to leave rates on hold this month.
On March 8, the bank became the first major central bank to pause its tightening campaign, leaving the key overnight interest rate on hold at 4.50%, as expected. It vowed to hold off on further hikes as long as inflation continued to ease in line with its forecasts.
In January the bank said it expected inflation to ease to 3% at around mid-year and to slow to 2% next year. But during the deliberations ahead of the announcement, the bank noted that services inflation “is proving sticky”, according to minutes from the policy-setting meeting released on Wednesday.
The five-member governing council remains “concerned about the risk that inflation could get stuck materially above the 2% target,” the minutes said.
But all five members backed keeping rates on hold to measure the effects of previous hikes because they agreed “the economy is slowing, and inflation is coming down”.
Over the past year, the bank raised rates eight times in a row by a total of 425 basis points to tame inflation, which peaked at an annualized rate of 8.1% last year and slowed to 5.2% in February.
“After increasing the policy rate at each of the last eight decisions, Governing Council saw the pause as an opportunity to learn whether interest rates had increased enough to return inflation to the 2% target,” the minutes said.
The council operates on a consensus basis and does not vote on policy decisions.
The situation has changed markedly since March 8. Bank failures in the United States and Europe show that pushing up rates too high could fuel further financial instability, and underpin a continued pause on rates in Canada.
On March 8, money markets were betting that the Bank of Canada’s next move would be another rate increase by September. Now they are betting there will be a cut by July.
(Reporting by Steve Scherer, editing by David Ljunggren)
((Reuters Ottawa bureau, +1 647 480 7921; david.ljunggren@tr.com))
