By Promit Mukherjee
OTTAWA, June 24 (Reuters) – The Bank of Canada’s governing council agreed to keep its monetary policy nimble to respond to new U.S. trade restrictions, the impact of energy prices, or both playing out at the same time, according to the minutes of its meeting released on Wednesday.
The Bank of Canada had left its key interest rate unchanged at 2.25% on June 10 as widely expected and Governor Tiff Macklem said the central bank was seeing limited evidence that higher energy prices were fueling broad-based inflation.
The central bank has kept its policy rate at the lower end of its neutral level – neither stimulative nor restrictive – since October, citing primarily economic slack.
But the war in the Middle East has led to higher gasoline prices up until the beginning of June, pushing May inflation to 3.2%, the first time in 29 months that the headline figure has gone past the BoC’s 1% to 3% target range.
“Governing Council members agreed the economic situation presented a dilemma for monetary policy,” the summary of deliberations said.
The six-member rate-setting council weighed the factors confronting the Canadian economy – weak growth which requires rates to be lowered, but high inflationary pressures which need rate hikes.
“In responding to the rise in inflation, the Governing Council did not want to over-react, but nor did it want to be too slow to respond,” the deliberations said, adding that if the CPI data began to show evidence that inflation was becoming more persistent, it would be a signal to hike rates.
However, it clarified that outside of energy prices, inflationary pressures were generally contained.
Money markets, which had priced in a December rate hike after the inflation data, have since pared those bets and now expect the BoC to keep rates unchanged through year-end.
The economy slipped into a technical recession at the end of the first quarter but the BoC has cautioned against putting too much weight on the data.
The Governing Council shared the view that a recession is characterized by a “deep, widespread and persistent decline” in aggregate economic activity.
“Members agreed that the economy was weak; it was still operating in excess supply and there was slack in the labor market. But the economy was not clearly in recession,” the summary statements showed.
Overall, members agreed that the economy appeared to be returning to growth, the statement said.
The members were also united in their view that the upcoming review of the United States-Mexico-Canada free trade agreement was an important source of uncertainty and that could lead to policy action in case the review turns out to be negative.
(Reporting by Promit Mukherjee; Editing by Chizu Nomiyama )
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