The Bank of Canada’s latest half-point cut was a ‘close call’, the summary says

The Bank of Canada’s decision to deliver another outsized rate cut earlier this month was a close call, with some policymakers favoring a more patient approach amid a rebound in consumer spending and a rebound in the housing market.

The central bank cut its key interest rate by half a percentage point to 3.25 percent on December 11 – the fifth cut in a row since June, and the second half percentage point cut in a row.

The outsized move was not a foregone conclusion, according to a summary of the discussions that took place ahead of the latest rate decision. Every member of the six-person governing council felt the choice between a quarter-point and a half-point was a “close call,” the summary said. Some wanted the bank to proceed cautiously, given conflicting signals in the data.

“With the economy not weakening rapidly, there was an opportunity to cut by 25 basis points and gather more information,” the summary said, explaining the thinking of the more hawkish members of the Governing Council.

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The council, led by Gov. Tiff Macklem, ultimately rallied behind a half point for two reasons. Overall economic growth had underperformed the bank’s forecast in the third quarter. And with inflation back to the bank’s 2 percent target, interest rates “no longer needed to be clearly restrictive.”

Still, the summary of deliberations published on Monday highlights how monetary policy has moved into a gradual phase where further cuts are not guaranteed with every rate announcement.

“There was a range of views on how much further the policy rate should be lowered and over what period it should happen,” the document said. It reiterated that the Governing Council is likely to consider more rate cuts, but at a more “gradual” pace.

Financial markets put the odds of another quarter-point cut in January at about 55 percent, according to LSEG data. Investors expect a total of two reductions next year, which brings the policy rate up to 2.75 per cent. in July.

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The latest rate decision was complicated by mixed economic data. Canada’s third-quarter gross domestic product growth came in below the bank’s forecast, with particularly weak business investment numbers. The unemployment rate rose to 6.8 percent in November, the highest rate since January 2017.

At the same time, “there were clear areas of strength,” the summary noted. Consumer spending grew nearly 3.5 percent in the third quarter, helped by a rebound in car purchases, while home sales nationwide have risen over the past four months. This suggests that the Canadian economy is beginning to respond to the central bank’s series of rate cuts since early summer.

“Overall, while the data was mixed and the outlook clouded by heightened uncertainty, Governing Council members concluded that with inflation on target, economic growth weaker than expected and surplus supply in the economy continuing to build, a further reduction in the policy rate was much needed,” the summary says.

The latest GDP numbers, released Monday, show the Canadian economy grew a solid 0.3 percent in October, thanks to a rebound in mining, oil and gas activity. The advanced estimate for November showed a decline of 0.1 percent.

The outlook for Canada’s economy is unusually bleak. Ottawa’s new immigration caps are expected to slow population growth next year, leading to lower economic activity than the central bank had predicted. There remains considerable uncertainty about how the policies will be implemented.

Meanwhile, US President-elect Donald Trump’s threat of tariffs hangs over Canadian exporters. The bank said the economic impact of a possible trade war would depend on several factors, including the size and scope of any tariffs and whether Ottawa retaliates.

“Members acknowledged that the increased uncertainty could already affect the outlook, particularly for business investment, but it was not possible to assess the wider implications without more information,” the summary said.