Minutes show officials feel less need for restrictive policy as inflation eases
The Bank of Canada’s governing council agreed there was no need for its key interest rate to remain highly restrictive ahead of its October 23 decision to cut rates, according to minutes released Tuesday.
The council expressed confidence that inflation pressures would continue to ease, leading to the decision to reduce the policy rate by 50 basis points to 3.75%. This marked the bank’s fourth consecutive rate cut and its first larger-than-usual adjustment in over four years.
While the council members discussed the option of a smaller 25 basis point cut, they reached a consensus that a more substantial reduction was appropriate given recent economic data.
“Governing Council members wanted to convey that a larger step was appropriate given the economic data seen since July,” the minutes stated.
The larger rate cut also raised concerns within the council. Members worried that the 50-basis point cut could be interpreted as an indication of deeper economic issues, potentially leading to expectations of more large cuts or a shift toward very accommodative policies in the future.
However, members ultimately agreed that a substantial cut was justified, given ongoing weaknesses in the labour market and the need for stronger growth to address excess supply in the economy.
Canada’s inflation rate declined to 1.6% in September, falling below the midpoint of the Bank of Canada’s 1% to 3% target range as higher interest rates continued to suppress consumer prices.
Read next: TD Economics: Jumbo rate cuts not the solution for mortgage renewal surge
At the same time, Canada’s economic growth has slowed, with GDP stalling in August and projections suggesting the economy will fall short of the central bank’s revised 1.5% growth target for the third quarter.
The central bank’s report also addressed the impact of Canada’s slowing population growth on the economy, noting that Prime Minister Justin Trudeau’s recent policies could cause the population to decline by 0.2% in both 2025 and 2026 before marginally increasing in 2027.
According to the minutes, “The slowing rate of population growth would act as a brake on total consumption growth,” which could weaken in the short term. However, the bank expects that lower interest rates will eventually support stronger consumption growth.
The six-member committee also discussed potential risks related to the housing market. Lower rates, pent-up demand, and new mortgage qualification rules could drive stronger-than-expected demand for housing, potentially pushing home prices higher.
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
