Some Bank of Canada officials worried half point cut might signal economic trouble

Some Bank of Canada officials expressed worries during the last policy meeting that an “unusual” 50-basis-point might be “interpreted as a sign of economic trouble” and would lead to expectations of further outsized cuts, according to the Bank’s meeting deliberations summary released Tuesday.

The summary laid out similar diagnosis for the Canadian economies as in the Monetary Policy Report released along with the October meeting. Consumption has been weak in Canada, especially in per capita terms and the officials reasoned that the anticipation of higher mortgage rate reduced lenders’ willingness to spending as well as that elevated interest rate incentivized people to save more.

Members of the central bank’s Governing Council, who held the meeting before the Liberal government announced the plan to reduce permanent residents by over 20% in the next three years, also expressed worries that slower population growth will “put a brake on” recovery in total consumption. Given the lag required for interest rate cut to have full effect on consumers, the timing of total consumption pickup would be “particularly hard to predict.⁠’

On business investment front, domestic-oriented firms are delaying investment plans due to soft demand but export firms are more optimistic about the outlook.

But residential investment is still soft despite successive reductions in interest rate, making some bank officials to think that potential homebuyers were still “waiting to see lower mortgage rates before buying.” The central bankers, meanwhile, also worried that pent-up demand and new mortgage qualification rules announced by the federal government may end up boosting home prices more than the Bank expected.