The Bank of Canada’s governing council was on the same page about the need to lower its benchmark interest last month — but the exact timing of the cut was up for debate.
The central bank on Wednesday released the summary of deliberations from its decision two weeks ago to lower the policy rate by a quarter point to 2.25 per cent in its second consecutive cut.
Those documents show council members felt the cut was warranted as a weak economy hampered by U.S. tariffs was expected to keep inflation around the Bank of Canada’s two per cent target for the foreseeable future.
“While members agreed that a cut to the policy interest rate would be needed, they had a range of views about the timing of the cut,” the summary of deliberations read.
Waiting until a later decision would have given monetary policy-makers a better sense of how the economy was reacting to U.S. trade shifts as well as Ottawa’s long-anticipated federal budget tabled just last week, some members of council argued.
Arguments to cut sooner rather than later won the day amid a soft labour market and weak growth expectations for the second half of the year.
With that cut, the central bank’s governing council felt the Bank of Canada had likely done all it can to smooth the tariff transition and further rate reductions would likely be unnecessary if the economy continues to evolve in line with its expectations.
The Bank of Canada resumed publishing a central forecast for the economy and inflation in its monetary policy report published alongside the October rate decision.
Instead of a formal forecast, the central bank had published “illustrative scenarios” since January outlining several possible tariff impacts. But governing council signalled that uncertainty around U.S. trade had alleviated enough to give the central bank confidence to issue updated projections in October.
The Bank of Canada’s new forecasts see real gross domestic product growth averaging 0.75 per cent in the second half of this year, rebounding from a contraction of 1.6 per cent on an annualized basis in the second quarter.
Growth in consumption was expected to fuel the rebound, the summary of deliberations show.
While the bank’s top decision-makers hadn’t seen the federal budget yet, the deliberations show that government spending was expected to support the recovery, as well as housing activity.
Bank of Canada governor Tiff Macklem has said monetary policy — changes in interest rates — can only offer limited support through the tariff disruption, and that the bulk of the job is best left to targeted fiscal policy.
Macklem would not comment directly on measures in the federal budget during a scheduled appearance before the House of Commons finance committee last Wednesday.
But he told members of Parliament he believes the budget got the diagnosis right on what ails the Canadian economy: flagging productivity and low investment levels.
Macklem was asked at that committee whether annual government deficits and mounting debts were fuelling inflation. He said big deficits drive up inflation when the economy is overheated, but Canada’s economy is currently weak.
The Bank of Canada’s next interest rate decision is set for Dec. 10.
