Bank of Canada signals further rate hikes! Meeting minutes: elevated oil prices raise inflation risks; economic uncertainty will not hinder policy action.

Bank of Canada signals further rate hikes! Meeting minutes: elevated oil prices raise inflation risks; economic uncertainty will not hinder policy action. The minutes of the Bank of Canada's October monetary policy meeting, released on Tuesday, show that although persistently high international oil prices and the trade dispute with the United States have brought major uncertainty to Canada's economic outlook, policymakers believe these risks do not mean the central bank must pause action. If inflationary pressures persist, the Bank of Canada may still raise interest rates further. At its October 28 policy meeting, the Bank of Canada raised its benchmark interest rate by 25 basis points to 2.5%, its first rate hike in more than three years. The Governing Council led by Governor Tiff Macklem reached a consensus at the meeting that further increases in the policy rate may be necessary in the future. The summary of the meeting minutes noted that policymakers fully recognized that high oil prices, trade friction and changes in the global economic situation have brought considerable uncertainty to the Canadian economy, but this does not mean monetary policy should do nothing. The Bank of Canada said: "The Governing Council recognizes that uncertainty does not mean inaction, but members agreed that caution is needed to assess how changes in the economic situation will affect its judgment of the outlook." The meeting minutes show that policymakers also considered keeping interest rates unchanged at the October meeting. The main reason supporting a pause in rate hikes was that the recent rise in inflation was mainly concentrated in energy prices, while core inflation indicators remain close to the central bank's 2% target. However, the key factor that ultimately prompted the central bank to decide on a rate hike was that the Middle East conflict has kept international oil prices persistently high, and policymakers expect this situation may last longer than previously thought. The Bank of Canada pointed out that the rise in energy prices and their pass-through to other goods and services prices increase the risk that inflation will remain persistently high and spread to broader areas of the economy. At the same time, the Canadian economy has shown stronger resilience than expected, meaning that the dampening effect of economic slack on price increases is weakening. The meeting minutes said: "The rise in energy prices and its pass-through effects together increase the risk that inflation will persist and spread widely. As the economy is expected to perform more robustly, the downward price forces capable of offsetting these cost pressures have also weakened." Although policymakers held differing views on the speed and extent to which higher energy prices will pass through to other areas, they agreed that the energy shock alone is enough to keep Canada's consumer price index (CPI) inflation at around 3% for more than a year, clearly above the central bank's 2% target. The labor market was also a focus of this policy discussion. Data released by Statistics Canada last week showed that employment fell slightly in October and the unemployment rate unexpectedly rose to 6.7%, indicating further signs of slowing in the labor market. The Bank of Canada's Governing Council acknowledged that the job market remains soft overall, but some members believed that, given the stronger performance of private-sector job creation, actual labor market conditions may be more robust than the overall employment data suggest. At the same time, policymakers believe that the Canadian economy still has a certain degree of spare capacity, but the recent pickup in economic growth is expected to gradually absorb excess supply, thereby weakening the dampening effect of economic slack on inflation. Taking these factors together, the Bank of Canada believes that the risk landscape facing the economy has changed. A longer-lasting energy price shock, combined with the resilience shown by the economy, further raises the risk that high inflation will persist and spread to more goods and services. The Bank of Canada's next policy meeting will be held on December 9. Currently, pricing in the overnight index swap market shows that traders expect the central bank to raise rates again at that meeting with a probability of about 50%. This means that although the Canadian economy is still affected by trade friction, a weak job market and global economic uncertainty, persistently high energy prices are making the central bank more vigilant about inflation risks. Inflation, employment and economic growth data in the coming weeks will become an important basis for deciding whether the Bank of Canada will continue raising rates in December.