To accelerate or not the rate cut | The Bank of Canada hesitates between two scenarios

Should we continue to cut interest rates in small steps or accelerate them? Divided between these two scenarios, the Bank of Canada’s leaders have decided not to make a decision and to take their decisions one at a time.

“Given the opposing forces putting pressure on inflation, members agreed that there was no predetermined path for interest rates and that they would take their decisions one at a time, based on new data,” they concluded from their deliberations that led to the decision to lower the central bank’s key interest rate from 4.5% to 4.25%.

According to a summary of those deliberations released Wednesday, Gov. Tiff Macklem and all the deputy governors all agreed on one thing when they met before the latest decision: Continue to cut interest rates to give the economy some breathing room.

The economic outlook is darkening, they noted. They said they believe the economy needs to be revived to prevent inflation from slowing too much.

Should we move faster with 50 basis point cuts rather than 25 points as in the previous two reductions? Yes, if the economy and the labor market continue to weaken, they concluded.

Central bank officials have raised the possibility that lowering rates could help the economy rebound more quickly than expected. They are particularly concerned about home prices, which could start to rise again, and about continued strong wage growth. “If that were to happen, it might be appropriate to slow the pace of future rate cuts,” they said.

After weighing up these two options, either to accelerate or to slow down, the monetary authorities decided to continue on the same path, with a third consecutive reduction of 25 basis points in the key rate.

The decision was announced on September 4. Since then, another reading of the Consumer Price Index showed inflation was back to the Bank of Canada’s 2 per cent target, leading many economists to say the rate cuts could accelerate.

By October 23, the date of the Bank of Canada’s next decision, more figures on inflation trends will have been released, which could help bank officials decide whether to move faster or not with rate cuts.