The annual pace of inflation had reached 4.8 per cent the previous month, more than twice the Bank of Canada’s target. Having played down the risk of inflation through 2021, central bankers were beginning to sweat. It was long past time to start tightening monetary policy.
But there are arguments for remaining on hold until July, which could sway a group of wary central bankers, scarred by the experience of losing control of inflation, which got as high as 8.1 per cent in mid-2022. “There’s no right answer as to when you should cut. There’s a judgment made by central bankers based on a swath of data, and unless you’re in the room you don’t know specifically what will tip the scales toward one decision or another,” Frances Donald, chief economist of Manulife Financial, said in an interview.
Based on the data alone, it’s becoming hard to make the case that the bank’s policy rate should still be at 5 per cent, a two-decade high reached last summer. Simply put, inflation looks fairly good, while the economy looks fairly bad. Meanwhile, the Canadian economy is stumbling. Unemployment is up a full percentage point over the past year and business insolvencies have spiked. The economy as a whole has been operating below potential for several quarters.
“It’s a tough decision and it’s a close call, and of course, what’s made it a tougher call is the fact that the prospects of the U.S. cutting rates keeps getting pushed further and further into the distance,” Mr. Porter said. “If it was simply a domestic issue, I don’t think it would be that tough a call. I think the bank would be leaning pretty heavily to starting the process now.”
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