But minutes of its latest rates decision show further cuts are still possible
The Bank of Canada decided to cut interest rates at its July meeting with a further quarter-point decrease to 4.5%, but what went on behind the closed doors of the Governing Council who made that decision?
The minutes of the several meetings that led to the July 24 announcement show that discussions around global growth centred on the potential for a slowdown in the US economy, and while the Canadian economy was seen as resilient, the committee noted that the economy appeared to be in excess supply, meaning there is scope for economic growth to rise without sparking new inflationary pressures.
The housing market was discussed with members concluding that imbalance between supply and demand was likely to persist for some time with resale activity subdued and builders still reluctant to add new supply due to construction costs.
The cost of housing remains a key driver of inflation though and while mortgage costs were easing, rent inflation was 9% in June.
Slack in the Canadian labour market is also expected to remain for now, with new entrants to the workforce, young people in particular, finding it harder to get a job with job vacancies around historical norms and fewer businesses reporting labour shortages.
Inflation vs. monetary policy
With the recent rate cuts, the BoC has hinted at further easing of monetary policy where appropriate. In their July decision, Governing Council members were confident that monetary policy had “worked to relieve price pressures, and that it would continue to exert downward pressure on inflation.”
“Overall, members expected core inflation to ease gradually to about 2.5% in the second half of this year and then ease further in 2025. Because of base-year effects from gasoline and some durable goods, total CPI inflation was projected to fall below core in the second half of this year and then edge up to be above core in early 2025, as base-year effects fade. CPI inflation was expected to ease to the 2% target in the second half of 2025,” the BoC’s report says.
With more household formation, driven by population growth, but weak productivity, the BoC committee believes that weak consumer spending and high borrowing costs could continue to weigh on consumer sentiment.
The Governing Council said that there are still factors that could push up inflation but also some that could see it pushed down too far. However, they believe that restrictive, but not as restrictive, policy is appropriate.
“The countervailing forces pushing inflation down and pulling it up meant that progress could be bumpy, and there could be setbacks in progress toward the target. Members expressed a range of views on how these forces might play out over time and the implications for the timing of future cuts to the policy interest rate. Given these uncertainties, they agreed there was no predetermined path for the policy rate. They would take decisions one meeting at a time,” the report concludes.
