The Bank of Canada debated whether or not to raise rates in July, amid uncertainty about the impact of monetary policy

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Faced with uncertainty about the strength of monetary policy, the Bank of Canada’s governing council debated whether or not to raise interest rates in its July rate announcement – ultimately deciding to move again as a kind of insurance against climbing inflation.

A summary of the discussions that led to the July 12 decision, published on Wednesday, show that Governor Tiff Macklem and his team were on the fence about further tariff increases.

The economy was proving stronger than expected by the central bank, and measures of core inflation – which capture underlying price pressures – were still too high. But the governing council was unsure whether this was because past interest rate hikes were simply taking longer than expected to work, or because interest rates were not restrictive enough.

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“The discussion turned to whether it was appropriate to raise the rate in July or to wait for more evidence to strengthen the case for further tightening. The consensus among members was that the cost of delaying the action was greater than the benefit of waiting,” the discussion summary said.

“With inflation projected to be around 3 percent for next year and upside risks to inflation expectations and household spending, members of the Governing Council were concerned that progress towards price stability could stall, and inflation could even rise again if upside surprises materialize,” she added.

The rate decision raised the central bank’s benchmark rate to 5 percent, the highest level since April 2001.

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The minutes of the meeting say nothing about what the bank will do with its next rate decision in September. 6. Macklem’s comments from two weeks ago that the bank remains data-dependent and is ready to raise rates further if economic activity and inflation are not heading in the right direction.

At this point in the bank’s fight against inflation, each rate decision is an exercise in risk management, weighing the chances of inflation stalling above the bank’s 2 percent target against the risk of doing too much and pushing the Canadian economy into an unnecessarily painful recession.

Consumer Price Index inflation has fallen sharply since last summer – reaching an annual rate of 2.8 percent in June, up from 8.1 percent a year earlier. At the time of this month’s rate hike, the latest CPI data showed 3.4 percent inflation.

Inflation is a big step in the right direction. However, the bank’s latest economic projection, released this month, extended the timeline it thinks it will take to get inflation back to its 2 percent target. It now believes this won’t happen until mid-2025, two quarters later than previously expected.

“Members agreed that there was considerable uncertainty around the outlook for inflation given the resilience of core inflation and the counterbalancing of forces supporting demand,” the review said.

The fact that the bank is still hiking interest rates at all is due to the surprising resilience of the Canadian economy. Consumer spending has proven much stronger than anyone expected, and the labor market remains strong, even as unemployment has started to spike slightly in recent months.

The summary noted a number of forces that were adding this resistance to consumer demand, including high wage growth, accumulated household savings, and strong immigration-driven population growth.

The relationship between high levels of Immigration and inflation has become a major topic of debate among economists. The Governing Council spent time discussing the issue, the minutes said, determining that population growth helped ease the labor shortage and increased demand for goods and housing.

“Members agreed that it was difficult to accurately estimate the net effect of population growth on excess demand, but they saw the first-order effect as roughly neutral,” the summary said.

The Governing Council expects household consumption to cool as previous rate hikes move through the economy. The interest rate increases work with a lag, as homeowners with fixed-rate mortgages reset with higher rates, leaving them with less money for discretionary spending.

“But this moderation will last longer than previously anticipated given the stronger-than-expected momentum in consumption in the second quarter and the combination of a still tight labor market with savings accumulated by households,” the summary said.