Residential Market Commentary - War and Inflation Worries

The decision-making process at the Bank of Canada has become a lot less mysterious since 2023, when the Governing Council started releasing its Summary of Deliberations. The latest summary offers some insights about how the process works. 

The war in Iran was top of mind for the policy makers at the Bank, but they decided they “should not lose sight” of other major economic issues as they make their Policy Rate decisions. 

The bankers’ key concern continues to be inflation, or more precisely expectations about inflation. The war has driven up fuel prices which are a very high-profile contributor to inflation. 

“Higher gasoline prices, combined with still-elevated inflation in essentials such as groceries, could push up inflation expectations,” the summary said. “This was particularly relevant given that the experience with high inflation in 2022–23 remained fresh in people’s minds.” 

When the wide-spread expectation is that prices will rise high and fast there are two things that can happen to hinder the economy: businesses can more readily increase prices and, as things get more expensive, fewer purchases get made. Therefore, there is “potential for weaker near-term growth and upside risks to inflation,” according to the Bank. 

Still, the Bank says it will “take some time” to see how the conflict in Iran plays out. Headline inflation remains close to the Bank’s 2.0% target and core inflation pressures are seen as “limited.” 

The Bank held its trend-setting, overnight rate at 2.25%.