BoC latest rate cuts was a ‘close call,’ summary says

The Bank of Canada’s decision to deliver another oversized interest-rate cut earlier this month was a close call, with some policy makers advocating a more patient approach amid a recovery in consumer spending and pickup in the housing market.

 

The central bank lowered its policy rate by half a percentage point to 3.25 per cent on Dec. 11 – the fifth consecutive cut since June, and the second half-point cut in a row.

 

The oversized move was not a foregone conclusion, according to a summary of the discussions that took place ahead of the latest rate decision. Each member of the six-person governing council felt the choice between a quarter-point and half-point cut was a “close call,” the summary said. Some wanted the bank to proceed cautiously, given conflicting signals in the data.

 

“Since the economy was not weakening quickly, there was an opportunity to cut by 25 basis points and gather more information,” the summary said, explaining the thinking of the more hawkish members on the governing council.

 

The council, led by Governor Tiff Macklem, ultimately coalesced behind a half-point cut for two reasons. Headline economic growth had undershot the bank’s forecast in the third quarter. And with inflation back to the bank’s 2-per-cent target, interest rates “no longer needed to be clearly restrictive.”

 

Still, the summary of the deliberations, published Monday, highlights how monetary policy has moved into an incremental phase, where additional cuts aren’t guaranteed at each rate announcement.

 

“There was a range of views on how much further the policy rate would need to be reduced, and over what period that should happen,” the document said. It reiterated that the governing council will likely consider more rate cuts, but at a more “gradual” pace.

 

Financial markets put the odds of another quarter-point cut in January at around 55 per cent, according to LSEG data. Investors expect two cuts in total next year, bringing the policy rate to 2.75 per cent by July.

 

The latest interest-rate decision was complicated by mixed economic data. Canada’s gross domestic product growth in the third quarter came in below the bank’s forecast, with particularly weak business investment numbers. The unemployment rate jumped to 6.8 per cent in November, the highest jobless rate since January, 2017.

 

At the same time, “there were clear areas of strength,” the summary noted. Consumer spending grew almost 3.5 per cent in the third quarter, helped by a rebound in automobile purchases, while home sales across the country have increased for the past four months. This suggests the Canadian economy is starting to respond to the central bank’s string of rate cuts since the early summer.

 

“Overall, while the data were mixed and the outlook was clouded by increased uncertainty, Governing Council members concluded that with inflation on target, economic growth weaker than expected and excess supply in the economy continuing to build, a further reduction in the policy interest rate was needed,” the summary said.

The latest GDP numbers, published Monday, show the Canadian economy grew by a solid 0.3 per cent in October, thanks to a rebound in mining, oil and gas activity. The advanced estimate for November showed a 0.1-per-cent contraction.

 

 

The outlook for Canada’s economy is unusually hazy. Ottawa’s new immigration caps are expected to slow population growth next year, leading to lower economic activity than the central bank was forecasting. Considerable uncertainty remains about how the policies will be implemented.

 

Meanwhile, U.S. president-elect Donald Trump’s threat of tariffs is hanging over Canadian exporters. The bank said the economic impact of a possible trade war would depend on several factors, including the size and scope of any tariffs and whether Ottawa retaliates.

 

“Members acknowledged that the increased uncertainty could already be affecting the outlook, particularly for business investment, but it was not possible to assess the broader implications without more information,” the summary said.

 

 

 

 

 

This article was first reported by The Globe and Mail