(Bloomberg) -- Bank of Canada officials acknowledged their decision to cut interest rates by half a percentage point for a second consecutive meeting was a “close call,” with some policymakers initially tilting toward a smaller reduction in borrowing costs.
Some members of the central bank’s governing council suggested a quarter percentage-point cut would be the best move, allowing time to weigh the impact of rate cuts since June, which had already led to stronger consumption and housing activity.
“Some members suggested that policy could be patient while the full effects of past interest rate cuts became clearer,” according to a summary of deliberations of the Dec. 11 rate decision.
Ultimately policymakers decided to cut the benchmark overnight rate by 50 basis points to 3.25%, after concluding that monetary policy “no longer needed to be clearly restrictive,” with inflation at 2%, the economy in excess supply and given the weaker outlook for growth.
While officials acknowledged that “not all the recent data pointed to the need for a 50 basis-point cut,” they believed easing of that magnitude was unlikely to bring rates “lower than they needed to go over the next couple of meetings.”
The document released Monday reveals some reluctance among officials to deliver back-to-back outsize cuts, consistent with the central bank’s recent signals that they now plan to take a more gradual approach after easing monetary policy to levels that are less likely to be crimping economic growth.
During the October meetings when they decided to make their first 50 basis-point cut this cycle, officials expressed concern that the faster pace of easing would be misinterpreted as a sign of trouble for the economy, or create the impression that interest rates would need to become “very accommodative.”
After they reached the decision to undertake a second consecutive large cut in December, policymakers agreed there were likely to be further reductions in interest rates. But there was also some debate as to how much further they should lower borrowing costs.
“There was a range of views on how much further the policy rate would need to be reduced, and over what period that should happen,” the bank said.
Policymakers also discussed the following issues during their deliberations:
- On the Canadian government’s efforts to reduce the inflows of newcomers, the bank viewed the demand effects from lower immigration as stronger than the supply impact in the near term. They also agreed the planned reductions will translate into lower gross domestic product growth, with lower aggregate consumption and less demand for housing. They noted the policy may lead to labor shortages for some businesses.
- On the threat of US tariffs on Canadian exports, officials were concerned that the uncertainty could weigh on business investment, which was “considerably weaker than anticipated” in the third quarter. To assess the implications on economic activity and inflation, they said they needed more information, including the scope and size of the tariffs and any retaliatory measures — “all of which are impossible to predict.”
- On the recent weakness of the Canadian dollar, policymakers acknowledged that the divergence between US and Canadian monetary policy was “likely having some impact” on the depreciation. They viewed lower exchange rates as helping to boost US demand for Canadian goods, while raising prices for imports, which could feed though to inflation in consumer goods and higher costs of production inputs.
- The bank still sees the economy remaining in excess supply, with labor market slack increasing as population growth outpaced job creation. They agreed the neutral rate — an estimate of the level of borrowing costs which neither restrict or stimulates the economy — continues to to be in the range of 2.25% to 3.25%. They said that if growth didn’t pick up, “there could be more downside risk to the inflation outlook.”
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