(OTTAWA) The Bank of Canada says it does not want to raise interest rates more than necessary, the members of its board of directors being aware of the risks associated with an excessive increase.
The central bank on Wednesday released a summary of the deliberations leading up to its July 12 decision, in which it raised its key interest rate again, as the economy turned out to be healthier than expected.
The central bank thus raised its key rate by a quarter of a percentage point, bringing it to 5.00%, its highest level since 2001.
According to the summary, the board considered whether rate hikes were simply taking longer to affect the economy or whether interest rates had not risen enough to slow the economy and slow inflation.
“If monetary policy was not tight enough to bring inflation back to target within a reasonable time, rates may have to be raised again later. If monetary policy took longer to act only because the effects of nominal tightening were only beginning to trickle down to aggregate consumption, tightening too much could make economic conditions more difficult than necessary,” the summary said.
Ultimately, the bank’s policymakers felt that both factors were partly at play, but that the cost associated with waiting too long before raising rates outweighed the benefits.
Annual inflation in Canada has slowed considerably since last summer, reaching 2.8% in June. This is within the central bank’s target range, which is between 1.0% and 3.0%.
But the Bank of Canada is still concerned about price growth, as the core measure of inflation, which does not take into account the most volatile prices, remains high.
The central bank also expects the return to 2% inflation to take longer than it had previously anticipated. New projections released earlier this month show that inflation is expected to hover around 3% over the next year, before declining steadily to 2% by mid-2025.
The document reiterates that the Bank of Canada intends to make its future rate decisions “one at a time,” based on the economic data available to it.
The central bank’s next interest rate decision is scheduled for September 6.
