The Bank of Canada ended up cutting its policy rate by 25 basis points to 2.25% in October even though there was a “range of views” on whether to delay such action.
While members agreed that a cut to the policy interest rate would be needed, they had a range of views about the timing of the cut.
The minutes of the October 29 meeting show that Governing Council members discussed whether to wait for more information on the economy, U.S. trade policy developments and Canada’s fiscal policy. Ultimately, arguments to cut rates on Oct. 29 were “more salient”, the central bank said, citing continued excess supply, labor market weakness, tepid growth projections and inflation expected to be close to the 2% target.
The central bank also stressed that with the key policy rate at the lower end – “on the stimulative side” – of the estimated neutral range, monetary policy was “likely close to the limits of what it could do to support the economy in the current circumstances.”
In fact, the third quarter Market Participant Survey of the Bank of Canada shows that the median expectation for the policy rate is 2.25% through Q2 2027, before an increase to 2.50% in Q3 2027. The survey of about 30 market participants also shows that the probability of the Canadian economy being in recession is highest (35%) over the next six months.
Source: Bank of Canada
This doesn’t mean a rate cut is entirely impossible. While structural adjustments explain half of the downward revision to the growth path of the economy, the other half comes from weaker demand, which means that “monetary policy could play a role in mitigating the spillovers from hard-hit sectors to the rest of the economy.” The central bank could also provide “some stimulus” to smooth economic adjustments.
Overall, the recent language of the Bank of Canada raised the bar for an additional rate cut.
The Oct. 29 actual policy statement said:
The structural damage caused by the trade conflict reduces the capacity of the economy and adds costs. This limits the role that monetary policy can play to boost demand while maintaining low inflation.
The minutes reinforced that stance as they indicated changes to the outlook would have to be material before the Bank considers taking its policy rate below the current 2.25%.
The next interest rate announcement is December 10.
