(Bloomberg) -- Some Bank of Canada officials are increasingly worried about downside risks to inflation as they decide how to set interest rates, while others see them as more balanced.
The six members of the bank’s governing council had differing opinions about inflation threats when they met in early September, according to a summary of deliberations released Wednesday. Ultimately, they decided to cut the policy rate to 4.25% and signaled more easing to come.
Some members see the potential for shocks in either direction and expect shelter and service price inflation to offset the downward pressure of slowing economic growth. Others are increasingly focused on the risks associated with a further weakening of the economy and the jobs market.
The divergent views were reflected in governing council’s discussion of two scenarios — both hinged on the outlook for consumption and the housing market.
Policymakers said it “may be appropriate to lower the policy interest rate more quickly” if growth and the labor market remain weak or further deteriorate because of sluggish consumption or housing. On the flip side, policymakers said “it may be appropriate to slow the pace of further cuts” if the economy and the housing market strengthened faster than expected and wage growth propped up service inflation.
Governor Tiff Macklem had already told reporters on Sept. 4 that the governing council had discussed those scenarios. Still, the deliberations highlight the uncertainty around the path for lowering borrowing costs in Canada.
Members agreed that there was “no pre-determined path” for interest rates and repeated that future decisions would be guided by data.
Governing council also said that the savings rate remained well above pre-pandemic levels, which could mean households were waiting for lower rates to make larger purchases or enter the housing market, or were putting more away in anticipation of higher mortgage payments when they renew.
On Tuesday, Statistics Canada reported that the consumer price index rose by 2% in August on a yearly basis — the slowest rate of increase since early 2021.
The same day, Senior Deputy Governor Carolyn Rogers told Bloomberg that “there’s still work to do” and policymakers want to see more progress on core price pressures.
The Bank of Canada next sets rates on Oct. 23, when it will also release updated forecasts in a monetary policy report.
Traders in overnight swaps have upped their bets for a larger-than-normal reduction at that meeting. Markets placed the odds of a 50 basis-point cut at about two-thirds on Wednesday, after the Federal Reserve lowered its benchmark interest rate by half a percentage point.
--With assistance from Randy Thanthong-Knight.
(Updates with more details from deliberations in the third, seventh and eighth paragraphs. Adds market expectations.)
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