As concerns mount for the Bank of Canada, its latest decision to reduce its key rate by 50 points rather than 25 points was “tight”.
Posted at 2:32 p.m.
This is revealed in the summary of the deliberations of the central bank's board of directors which led to the reduction of the key rate from 3.75% to 3.25%.
The two options, a reduction of 50 or 25 points, were weighed at length, we can conclude from the report of the discussions published on Monday.
“The data published since the last decision was mixed,” said the participants. “At the outset, each member recognized that the decision was close given their own assessment of the data,” the document reads.
The arguments for limiting the drop to 25 points were that consumption and activity in the housing sector are improving. “Some members argued that patience may be required as the full effects of past interest rate cuts become clearer.”
Those who favored a larger, outsized 50-point cut argued that economic growth was weaker than expected and there were risks that inflation could fall too far.
“Throughout the discussion, members' views on the benefits and risks associated with each of the options evolved,” according to the summary, suggesting that the discussions were more lively than at the beginning. habit.
Central bank leaders finally agreed to a 50-point cut in the key rate, to 3.25%, mainly because they believe stronger growth in the economy is necessary.
During these meetings which preceded the December 11 decision, Bank of Canada leaders also had different opinions “as to how low the key rate should go and how long it would take to reach that level.” .
The answer to this question remains to come. The board agreed that with a further 50-point reduction “the director's cumulative reduction since June was substantial and its effects would be felt throughout the economy.”
Further reductions in the key rate are to come, the bank's managers also envisage, but given the significant reductions already achieved, future reductions should be more gradual.
The Bank of Canada must juggle more and more uncertainties since the return to the presidency of Donald Trump. The possibility that the United States would impose tariffs of 25% on imports of Canadian products as early as January took up a large part of the discussions leading to the latest reduction in the key rate.
Leaders believe that this uncertainty is already having an effect on the economic outlook, and in particular on business investments which are on hold.
The weakness of the dollar is another worrying element for the central bank. A lower exchange rate helps exports, but makes imported products more expensive, “which could spur higher prices for consumer goods and increase the costs of inputs used in production,” its leaders fear.
The depreciation of the dollar is partly due to lower interest rates in Canada than in the United States, the Bank of Canada finally recognizes.
