The Bank of Canada left its overnight rate unchanged at 2.25% as expected. The accompanying statement revealed a central bank that is far less concerned about the recent rise in inflation than the headline numbers might suggest. While policymakers acknowledged that CPI inflation rose to 2.8% and is likely to hover around 3% in the near term, they repeatedly emphasized that higher energy prices are doing most of the work. In particular, BoC stressed that there has been “limited evidence of broad-based pass-through of higher energy prices to other consumer prices.”
The Bank’s assessment of the domestic economy remained cautious. It noted that first-quarter GDP contracted by 0.1%, housing activity declined, business investment remained weak and exports fell. While employment increased in May, policymakers pointed out that employment has been “little changed since the start of the year” and that the economy is expected to remain in “excess supply” even as growth resumes in the second quarter. Taken together, these comments suggest BoC still sees insufficient domestic demand pressure to justify tighter monetary policy.
That explains why policymakers are prepared to look through the current inflation surge. BoC explicitly stated that it is “continuing to look through the war’s near-term impact on headline inflation” even though oil prices are now roughly USD 10 per barrel above the assumptions in its April forecasts. At the same time, the Bank delivered a warning that it “will not let higher energy prices become persistent inflation.”
The message that BoC believes today’s inflation problem is largely imported through energy markets rather than generated by the Canadian economy itself, but it remains ready to act if those pressures begin spreading more broadly.
