Bank of Canada top officials in broad agreement for October’s half-point rate cut

Top officials at the Bank of Canada were in broad agreement last month that the central bank needed to accelerate the pace of interest-rate cuts with inflation back under control, according to a summary of the discussions that took place ahead of the latest monetary policy decision.

 

On Oct. 23, the bank cut its policy rate by half a percentage point to 3.75 per cent. That was the fourth consecutive cut since June and followed three smaller quarter-point moves.

 

“While members considered the merits of cutting the policy rate by 25 basis points, there was strong consensus for taking a larger step,” said the summary of deliberations published Tuesday. (There are 100 basis points in a percentage point.)

 

“Members felt increasingly confident that the upside pressures on inflation will continue to decline, so policy did not need to be as restrictive. Further, members felt that a larger step was appropriate given the ongoing softness in the labour market and the need for stronger economic growth to absorb excess supply.”

 

Having pushed interest rates up 10 times in 2022 and 2023 to a high of 5 per cent to check inflation, the bank’s six-person governing council, led by Governor Tiff Macklem, is now trying to get borrowing costs back to a more normal level to avoid an economic downturn or a further rise in unemployment.

Policy makers expect to keep easing monetary policy, although there’s no guarantee they will deliver another half-point cut in December. The summary said governing council members were nervous that the unusually large move in October “might be interpreted as a sign of economic trouble,” leading markets to assume more oversized cuts or a deeper easing cycle overall.

 

“While policymakers expect that interest rates will fall further, they wanted to convey that one 50-basis-point reduction does not necessarily imply further moves of that size nor does it mean that policy is on a path towards becoming very accommodative,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients about the summary of the central bank’s deliberations.

 

“That squares with our decision to forecast a 25-basis-point follow-up reduction next month as the Bank of Canada begins probing where the neutral rate lies.”

 

Financial markets put the odds of another half-point rate cut on Dec. 11 at around 40 per cent, according to LSEG data.

 

Inflation has declined more rapidly from the 8-per-cent peak reached in 2022 than the central bank or Bay Street economists expected. The annual rate of Consumer Price Index inflation was 1.6 per cent in September, below the bank’s 2-per-cent target for the first time since February, 2021.

 

Some of the recent decline is the result of falling oil prices, which the bank tends to play down when gauging broader inflationary pressures. But there are plenty of other signs inflation has come to heel. Rapid price growth is less broad-based and some goods prices are actually declining. Even shelter price inflation has begun to cool, with less upward pressure on rents.

“Overall, a range of developments suggested that inflation had returned to around the target following the post-pandemic spike,” the summary said.

 

Canada’s central bankers now want economic growth to start picking back up after a period of subpar performance, where gross domestic product (GDP) has edged up slowly and GDP per capita has declined.

 

Economic activity should get a boost as interest rates fall, making borrowing less expensive and leaving more money in borrowers’ pockets. But it’s unclear how quickly consumers will respond, and there are other factors weighing on consumption, including a slowdown in population growth as a result of lower federal immigration targets.

 

Governing council members “noted that it would take time for lower interest rates to have a big enough impact on per capita spending to overcome the drag on total consumption growth from lower population growth,” the summary said.

 

“As a result, they thought that consumption growth could slow in the near term even though reductions in interest rates would ultimately support stronger growth in consumption.”

 

 

 

This article was first reported by Globe and Mail