Worried about the weak economy, the Bank of Canada opted for an unusual 50 basis point cut in its key rate on October 23, but it did not consider an even deeper reduction.
Posted at 2:29 p.m.
This is what we learn in the summary of the deliberations which preceded the central bank’s latest decision to reduce its key rate from 4.25% to 3.75%.
A 75 basis point cut was part of the speculation leading up to the Bank of Canada’s latest rate decision, given faster falling inflation and continued weakness in the Canadian economy.
Such a significant reduction was not envisaged by the members of the management committee. On the contrary, some of them even worried about the negative message that a major cut of 50 basis points would send. “As a 50 basis point reduction is unusual, some members expressed concern that such a decision would be interpreted as a sign of economic difficulties, and would suggest that further measures of this magnitude would be taken or that the policy rate would have to become very expansionary in the future,” the document reads.
A more modest reduction of 25 basis points, which would have left the key rate at 4%, was however discussed, but participants in the discussions “were largely in agreement to make a bigger reduction”.
The inflation rate measured by the Consumer Price Index fell below the Bank of Canada’s 2% target in September, so its leaders are as concerned about inflation being too high as they are about inflation too low. They found deflation of -1.0% in the goods sector, while inflation was still high, at 4%, in the services sector.
The main uncertainties raised in the discussions concern population growth and the price of housing. The slowdown in demographic growth announced by the new government measures on immigration will be a brake on the economy. Furthermore, lower interest rates and new rules favoring access to mortgage financing could have the effect of increasing housing prices more than expected.
On balance, the Bank of Canada believed that upward pressure on inflation would continue to fade and that there was no need for policy to be so restrictive. A cut of 50 basis points, rather than 25 basis points, is necessary “given continued weakness in the labor market and the fact that stronger economic growth is needed to absorb excess supply,” they said. concluded its leaders.
Moving forward, participants agreed that further cuts will be necessary and “they exchanged views on the magnitude of additional reductions in the key rate that will be necessary.”
The summary says nothing more about the size of the coming cuts, but it does note that the Bank of Canada expects growth to accelerate. Since his last rate announcement, September Gross Domestic Product figures indicate that economic growth stagnated in August. Growth for the previous month, in July, was also revised downward by Statistics Canada.
The portrait of the employment market in October expected this Friday will be part of the reflections of the central bank whose next decision on rates is December 11. Most economists expect anemic job creation and a slight rise in the unemployment rate, which was 6.5% in September.
Given the uncertainty surrounding the impact of the American presidential election, a more modest drop of 25 basis points is considered more likely on December 11 by Desjardins economists.
