When deciding to leave interest rates unchanged at its Sept. 6 monetary policy meeting this month, the Bank of Canada determined the past hikes are working to slow the economy.

“[Governing Council] members agreed that data since their last decision had shown more clearly that demand was slowing, and excess demand was diminishing as monetary policy gained traction,” according to a summary of the meeting deliberations, released today.

Despite some “choppy” quarterly GDP results, with weak growth in the fourth quarter, followed by a stronger first quarter and another weak second quarter, members said the impacts of rate hikes are gaining traction and broadening throughout the economy.

“The economy appeared to have entered a period of softer growth,” the summary noted. “Members also noted that the full impact of more recent policy tightening had yet to be felt.”

Slowing housing demand and household credit

The council also noted that despite resale housing being higher than it was a year ago, it found that high interest rates have once again “dampened demand,” resulting in a softening market.

However, members also acknowledged that strong underlying demand and continued limited supply are continuing to push house prices higher. Also on the supply side, members observed that high interest rates were starting to weigh on homebuilders who are reporting difficulties in funding construction projects.

The summary notes that the impact of previous rate hikes are also working to “significantly” slow household credit. And while delinquencies remain at low levels, council members noted they are on the rise.

Inflation a “significant” concern

Despite signs of slowing excess demand in the economy, the Bank of Canada Governing Council highlighted that “the lack of progress in underlying inflation remained a significant concern.”

They also noted that while recent high oil and gasoline prices are likely to push inflation higher in the coming months, inflation is still expected to continue trending downward gradually. One contributing factor is that the impact of base-year effects will decrease as the large drop in commodity prices last year drops out from inflation calculations.

In the end, the council decided it could “choose to be patient, receive more data and see whether the evidence showed that interest rates were high enough to return inflation to target,” while recognizing that “policy might not yet be restrictive enough.”

The council was concerned that the decision may be interpreted as a sign that rate hikes had ended and that “lower interest rates would follow.”

But as BMO senior economist Robert Kavcic pointed out, the summary from the Bank’s Sept. 6 meeting maintained a hawkish bias. “The bias remains to tighten further if wages and inflation don’t cooperate,” he wrote.