Residential Market Commentary - The Horns of a Dilemma

The decision makers at the Bank of Canada appear to have felt they had been backed into a corner when they were making the interest rate decision that was announced back on June 10. 

The latest Summary of Deliberations shows the Governing Council debating an economic dilemma:  A weak Canadian economy that continues to operate below its potential, combined with high energy prices – caused by the war in Iran – that are pushing inflation above the Bank’s 2.0% target. 

If the Bank hiked its Policy Rate to hold down inflation and oil prices suddenly dropped the higher rates would have further weakened the economy.  But, if the Bank cut rates to bolster the economy it would increase the risk of sustaining high inflation and promoting its spread into the broader economy. 

Their solution, for the moment, was to hold the rate at 2.25% for a fifth straight setting. 

“For the time being, members were prepared to look through the near-term impacts of higher energy prices on inflation,” according to the summary. 

“Governing Council members agreed that holding the policy interest rate unchanged … balances the risks described above.” 

Ongoing uncertainties caused by the war, U.S. trade tactics and the continuing review of the CUSMA trade deal will likely keep the BoC looking in two directions for the foreseeable future. 

The BoC’s next interest rate announcement is set for July 15.