Bank of Canada worried jumbo rate cut would send sign of ‘economic trouble’ – National | Globalnews.ca
The Bank of Canada’s top decision makers worried the central bank’s oversized interest rate cut in October could send a dour signal about the state of the Canadian economy, according to new documents released Tuesday.
The Bank of Canada delivered a rare 50-basis-point cut to its benchmark interest rate on Oct. 23, the fourth consecutive drop but the largest in 15 years, outside the early days of the COVID-19 pandemic.
That oversized step brought the policy rate down to 3.75 per cent.
But a summary of the governing council’s deliberations from that decision shows worry among some officials that a drop of that magnitude would spark fears about what the central bank thought of the economy’s trajectory and the future path for interest rates.
“Since a 50-basis-point cut is unusual, some members expressed concern that it might be interpreted as a sign of economic trouble, leading to expectations of further moves of this size or to assumptions that the policy interest rate would need to become very accommodative in the future,” the deliberations read.
The Bank of Canada’s policy rate broadly sets the cost of borrowing in Canada. The central bank’s mandate is to keep inflation at two per cent, raising the rate when price pressures are too high and lowering it amid fears a slowing economy could send inflation too far below target.
Get weekly money news
Get expert insights, Q&A on markets, housing, inflation, and personal finance information delivered to you every Saturday.
Sharp drops in the policy rate can imply fears that monetary policy is too tight for the economy to function healthily and that the Bank of Canada is behind the curve, signalling that a steeper economic contraction may be coming.
With inflation falling to 1.6 per cent in September — arriving at target faster than the Bank of Canada had forecast — the governing council indicated it was increasingly confident that inflation was under control.
At the same time, weakness in the labour market and a more pronounced slowdown shaping up for the second half of 2024 had convinced central bank officials that the economy was firmly in “excess supply.” While the Bank of Canada projects a return to growth in the coming years, the deliberations noted that the exact timing of that rebound is up in the air, which risks inflation falling too far below two per cent in the meantime.
The governing council debated a more typical 25-basis-point step in October, but a “strong consensus” formed around the larger, 50-basis-point move.
Officials sought to clarify. however, that Canadians and market watchers should not necessarily expect half-point cuts at every meeting going forward, emphasizing in their communications that future decisions would be taken “one meeting at a time, guided by incoming data.”
The Bank of Canada’s final rate decision of the year is set for Dec. 11, with another cut widely expected.
© 2024 Global News, a division of Corus Entertainment Inc.
