Governing council weighs economic risks of 50-basis-point cut and forecasts tempered growth
The Bank of Canada's governing council, as reported by Financial Post, expressed caution regarding an October rate cut of 50 basis points, noting concerns that it could signal “economic trouble” and set expectations for further reductions of similar magnitude.
This apprehension emerged from a summary of their deliberations released on Tuesday.
Leading up to the Bank's decision to reduce its policy rate by 50 basis points on October 23—setting the overnight rate at 3.75 percent—inflation fell to 1.6 percent in September, under the Bank’s two percent target.
Additionally, the unemployment rate held at 6.5 percent, with younger job seekers disproportionately affected by joblessness.
The summary reveals that while the council considered a smaller, 25-basis-point cut, there was a strong consensus favouring the larger step.
According to the summary, “members felt increasingly confident that the upside pressures on inflation will continue to decline, so policy did not need to be as restrictive.”
The ongoing labour market weakness and a need for stronger growth also contributed to their decision for a more substantial cut.
Economic performance has lagged Bank forecasts in the latter part of the year. The October monetary policy report revised the third-quarter growth forecast to 1.5 percent, yet Statistics Canada recently projected growth closer to one percent.
The summary indicates, “Overall, members noted that growth in recent months had been slightly below potential, and considerable economic slack remained.”
Looking forward, the council anticipates inflation to stay near the target and predicts a 2.1 percent growth rate for the Canadian economy next year. They also discussed a potential decline in population growth in 2024, which could impact consumption and growth.
Their discussions preceded the federal government’s announcement of a 21 percent reduction in newcomer numbers by 2025. Statistics Canada now estimates that population growth may turn negative over the next two years, below the central bank’s initial projections.
In response to these immigration adjustments, Governor Tiff Macklem stated that policymakers will monitor population trends closely and “will be revising as we gain more confidence in what exactly is going to happen.”
Despite the challenges, governing council members remain optimistic about the impact of lower interest rates on consumption growth, expecting that high interest rates and elevated mortgage rates will diminish in importance over time.
However, they acknowledged that it could take time for lower rates to significantly influence per-capita spending.
The summary notes, “They also recognized that given uncertainties about both population growth and how quickly lower interest rates would lead to stronger spending, the timing of the pickup in total consumption was particularly hard to predict.”
The council agreed to continue making interest rate decisions based on incoming data, assessing each meeting independently, while remaining uncertain about the precise target for a neutral rate.
