Policymakers weighed economic risks and future rate cuts
With the Canadian housing market remaining subdued, Bank of Canada (BoC) Governing Council members believe consumers might be waiting for lower interest rates before making large purchases.
According to deliberation minutes from the BoC’s September 4 meeting, members discussed the possibility that caution among households is contributing to weakness in both consumer spending and residential investment.
The BoC cut rates by 25 basis points at the September meeting, reducing the policy rate to 4.25%. However, the minutes revealed that some Governing Council members were more concerned about downside risks to inflation, particularly if economic activity and the labour market continue to weaken.
Others felt that risks to the inflation outlook were balanced, with inflationary pressures easing as expected, and the economy largely aligning with the BoC’s forecasts.
Waiting for lower rates
Homebuying demand still hasn’t picked up even after the central bank’s three consecutive cuts.
The members noted that household savings rates remain higher than pre-pandemic levels, suggesting that this may be contributing to the subdued housing market and weak consumption.
“Consumers could be waiting for lower interest rates to make large purchases or enter the housing market, or they were saving in preparation for higher mortgage payments at renewal,” the minutes read.
Residential investment has decreased, with large declines in renovations and new construction further reflecting consumer hesitation.
The Governing Council also observed that while shelter price inflation remains a significant contributor to overall inflation, it has shown signs of easing as growth in mortgage interest costs has come down and rent inflation edged lower from its recent peak.
Labour market weakness
The BoC members discussed the labour market’s continued softening, with employment growth lagging behind the expanding labour force. Unemployment has increased, particularly among newcomers and youth.
While wage growth remained elevated compared to productivity gains, members expect it to ease as slack in the labour market increases.
Meanwhile, inflationary pressures continue to ease, with consumer price index (CPI) inflation falling to 2.5% in July, in line with the BoC’s projections. Core inflation measures have also decreased, and the share of CPI components growing above 3% is back to historical levels.
Despite some improvement, Governing Council members acknowledged downside risks to inflation. Some members worried that if the economy and labour market weaken further, inflation could fall more than expected.
"There is a concern that downside risks to inflation could materialize if consumption and residential investment do not rebound as expected," the minutes revealed.
Future rate decisions
While the BoC cut rates by 25 basis points in September, members emphasized that future rate decisions would be made on a meeting-by-meeting basis, guided by incoming data.
BoC Governor Tiff Macklem signalled a willingness to accelerate the pace of rate cuts, if necessary, but there is no pre-determined path for further reductions.
The Governing Council discussed scenarios where the economy may weaken further, prompting faster rate cuts, or conversely, where a stronger-than-expected recovery in housing and consumer spending could lead to a slower pace of easing.
“Lower interest rates could spur economic activity and the economy could rebound faster than anticipated in the latter half of 2024 and into 2025,” the minutes said. “The housing market could strengthen quickly, boosting house prices and shelter price inflation, and persistently elevated wage growth relative to productivity growth could prop up inflation in other services.
“In this scenario, it may be appropriate to slow the pace of further cuts in the policy rate.”
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However, the council also noted that the economy and labour market may not pick up as anticipated or may even weaken further if consumption and residential investment do not strengthen as expected.
“In such a scenario, it may be appropriate to lower the policy interest rate more quickly,” the minutes said.
In the end, members agreed to focus on balancing inflationary pressures while guarding against the risk of a deeper economic slowdown. With inflation approaching the 2% target, the Governing Council was cautious about cutting rates too quickly, even as it acknowledges the need to support economic growth.
Additionally, the council decided to continue its policy of normalizing the balance sheet by allowing maturing bonds to roll off.
BoC Deputy Governor Nicolas Vincent is expected to speak on Thursday, where more insights into the Bank’s future monetary policy direction could be revealed.
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