Key facts
- Governing council said uncertainty over the rate path did not mean inaction, but it would proceed carefully.
- The bank said higher energy costs could pass through into core inflation measures over time.
- Council agreed the energy shock alone would keep inflation near 3% for more than a year.
- The minutes said near-term inflation expectations had moved up and a higher policy rate was needed.
- Some economists and analysts said the bank had hiked prematurely, a view the minutes addressed.
Bank of Canada governing council members agreed ahead of the October 28 rate decision that uncertainty over the future path of rates did not mean the bank would do nothing, according to minutes released on November 10. The bank raised its key policy rate by 25 basis points to 2.5% at that meeting, its first increase in more than three years, citing higher energy prices that it said could feed into non-energy cost pressures.
The minutes said members noted considerable uncertainty over how higher energy prices and the trade war with the United States would affect inflation. "They recognized that uncertainty did not mean inaction, but they agreed they would need to proceed carefully to assess how economic developments would affect their outlook," the minutes said.
Canada's annual inflation rate reached 3.2% in September, above the bank's 1% to 3% target range, driven almost solely by higher energy and energy-related transportation costs. Although core measures were below the bank's 2% target, the minutes said cost pressures were building and would eventually show up in core measures as they reached consumer prices.
Some economists and analysts said the bank had raised rates prematurely, concerns that grew after a third consecutive month of falling employment. The bank worried that the longer energy costs stay high, the more likely they are to spread into the broader economy. Council agreed that even without that pass-through, the energy shock alone would keep inflation around 3% for more than a year, the minutes said.
The minutes also said businesses faced higher costs from non-energy imports that would eventually reach consumer prices. Members noted that inflation expectations may have become more sensitive to recent price changes, and that near-term inflation expectations had moved up. They said a higher policy rate was needed to reduce the risk that higher energy costs would spread to other goods and services.