The BoC’s latest meeting saw it raising rates by 25bps to 5.00% as expected. The Bank of Canada has now taken two back-to-back rates in June and July.
In a bid to address mounting price pressures and curb excessive demand, central banks face the delicate task of finding the right balance in their monetary policy decisions. Let’s examine the key points from recent Bank of Canada discussions on its top priorities.
Tackling inflationary pressures
Central banks recognize the importance of implementing higher interest rates to slow down the growth of demand in the economy and alleviate price pressures. By taking action now, the BoC hopes to prevent the need for more drastic measures in the future.
Labor market dynamics
Despite indications of some easing, the labour market remains tight, posing a challenge for policymakers. While signs of improvement are observed, the need to strike the right balance persists. Remember, a strong labour market is inflationary pressure.
Central banks are acutely aware of the risks associated with both under and over-tightening monetary policy. The BoC is striving to find a delicate equilibrium that ensures inflation is brought back to the target level without impeding economic growth.
Decisive action for a 25bps hike
The decision to raise rates reflects the BoC’s recognition of persistent excess demand and underlying inflationary pressures. The consensus among governing councils is that a more restrictive policy stance is necessary to steer inflation back to the desired 2% target. While discussions included the possibility of keeping rates unchanged, the governing councils weighed the costs of delaying action against the benefits of waiting. Ultimately, the consensus leaned towards the importance of timely measures to address inflationary pressures.
With successive increases in policy rates in June and July, there is cautious optimism from the BoC that inflation will gradually return to the 2% target. Going forward CAD traders should carefully watch incoming inflation and labour data. A weakening in jobs and inflation data could weaken the CAD. On the other hand, any further strengthening in jobs and inflation data could support the CAD.