The central bank ultimately opted to cut the policy rate by a quarter percentage point to 2.25%
by Erik Hertzberg and Nojoud Al Mallees
Bank of Canada officials discussed delaying a rate cut until they had more details about Prime Minister Mark Carney’s budget and US trade policy.
In a summary of deliberations from their Oct. 29 decision, policymakers said waiting until a future meeting would also have given them more information on labor market weakness, input cost pressures and underlying inflation.
The central bank ultimately opted to cut the policy rate by a quarter percentage point to 2.25%, which it views as “on the stimulative side” of their estimate for the neutral range of interest rates — where borrowing costs neither encourage nor restrict economic growth.
“With continued excess supply, labor market weakness, tepid growth expected in the second half of the year and inflation projected to stay close to the target, the arguments for cutting the policy rate in October were considered more salient,” the bank said in the document Wednesday.
Officials also made clear monetary policy was “likely close to the limits of what it could do to support the economy in the current circumstances.”
Finance Minister Francois-Philippe Champagne delivered the Carney government’s first budget about a week after the central bank cut rates. The fiscal plan showed the federal government running deeper deficits to fund infrastructure, military and housing, and also extended investment tax credits intended to crowd in private business spending.
Officials at the bank agreed they should be “as clear as possible” about communicating they’re comfortable keeping borrowing costs near the current level. The document reiterates they view the benchmark overnight rate as “at about the right level to keep inflation close to 2% while helping the economy.”
Policymakers said the shift in US trade policy to protectionism was unlikely to reverse, giving the central bank more “confidence” to be more forward-looking, even amid elevated uncertainty. The central bank provided base case projections for the economy in October for the first time since January.
At the same time, governing council agreed monetary policy “could play a role in mitigating the spillovers from hard-hit sectors to the rest of the economy.”
The bank said the auto, steel, aluminum and lumber sectors have been “severely hit” by the targeted US tariffs. Still, lower demand from the US for Canadian goods and services has spread to the rest of the economy.
The effects of the trade war on employment have also become clearer, and officials called the labor market “soft.”
“Job losses since January have been concentrated in trade-related sectors, and firms in other sectors seemed to be retaining their workforces for now. Nevertheless, members expressed concern that weakness in the labor market could persist and broaden,“ it said.
Since then, Statistics Canada’s October labor force survey showed the economy added 66,600 jobs, marking the second consecutive month of strong-than-expected employment figures. The jobless rate also dropped to 6.9%, down from 7.1%.
The central bank reiterated its view that underlying price pressures are around 2.5%. Officials said they see a “wider-than-normal range of risks and uncertainties” around inflation, including the ongoing trade discussions with the US and the upcoming review of the North American free trade agreement.
Policymakers next set borrowing costs on Dec. 10.
Copyright Bloomberg News
