Bank of Canada faces internal debate on rate hikes amid inflation concerns

OTTAWA – The Bank of Canada is currently grappling with the challenge of controlling inflation, which has been a persistent issue since late 2021. Internal divisions have emerged among members regarding the course of action needed to meet their 2% inflation target. While some members at the October meeting advocated for further rate hikes, others believed maintaining the current 5% policy rate might be sufficient.

Avery Shenfeld, Chief Economist at CIBC, in his weekly note on Friday, highlighted these divisions and pointed out that the economy’s fragility could play a role in influencing interest rates and managing inflation. He drew attention to factors contributing to inflation, such as oil prices and wage increases, which he expects to self-correct over time. However, Shenfeld also noted the persistence of shelter costs, which remain high and largely unaffected by interest rates.

Despite a slight decrease in home prices, Canadians continue to face escalating mortgage costs and rents due to high-interest rates. Tiff Macklem, Governor of the Bank of Canada, has suggested that rate cuts could be considered if core inflation shows signs of decreasing before reaching the 2% target. As it stands, Canada’s inflation rate was recorded at 3.8% in September, with core measures ranging between 3.5% and 4%. CIBC anticipates a decline in core inflation as economic activity slows.

Consumer confidence has taken a significant hit, particularly amongst the 45-54 age demographic who are highly indebted and have not previously experienced such high levels of inflation. Their spending habits combined with their current financial strains could potentially lead to a negative impact on consumption.

analysis also referenced transient inflationary factors such as the spike in oil prices due to the conflict between Hamas and Israel, which have begun to subside amid rising global demand concerns. The Bank’s consensus on slow economic growth is clear; however, there remains a split on how best to address inflation without further harming the economy.

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