Are we there yet?

Ahead of today's Bank of Canada rate announcement, there had been some speculation that the Bank might signal an imminent policy "pivot" with a rate hike of only 25 basis points. In the event the Bank opted for a 50 basis point move, bringing its target rate to 4.25 percent.  

The tone of the media release is very assertive, as the Bank tries to beat back criticism that its tightening may already have gone too far. This is particularly true of the paragraph on inflation, quoted hare in full:

CPI inflation remained at 6.9% in October, with many of the goods and services Canadians regularly buy showing large price increases. Measures of core inflation remain around 5%. Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum. However, inflation is still too high and short-term inflation expectations remain elevated. The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.

Not much hint of a pivot there, but other parts of the release strike s slightly softer tone: 

...there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter, and housing market activity continues to decline. Overall, the data since the October MPR support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year.

The final paragraph of the release, while reaffirming the Bank's commitment to restoring CPI to the 2 percent target, opens with a strong hint that the Bank may now pause for a while to assess whether it has tightened policy sufficiently: 

Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target. 

Surely not by coincidence, the economics folks at Scotiabank this week released a provocative report arguing that pandemic support programs (i.e. fiscal policy) account for the situation of excess demand that the Bank of Canada is trying to suppress. This statement from the report could hardly be more damning:

Pandemic support programs for firms and households are creating the excess demand that the country is experiencing. Absent from these support measures, Canada would still be in excess supply....

In other words, the Bank of Canada’s policy rate would not need to be above neutral were it not for these programs.

Indeed so. Monetary and fiscal policy working at cross purposes never ends well. The Bank must have been frustrated to see the Government's recent Fall Fiscal Statement, which loudly trumpeted restraint while spending most of the unexpected revenue boost that has accrued this fiscal year. That will not make the Bank's job any easier, but it still seems likely that there will be at least a pause in monetary tightening as we enter 2023.