A Delicate Balance: The Bank of Canada’s Policy Rate Decision
The decision by the Bank of Canada’s governing council members to cut the policy rate by 50 basis points in December was a ‘close call,’ according to minutes released by the central bank on Monday.
Background: Unemployment and Inflation Rates
In early December, policymakers decided to cut the policy rate by 50 basis points for the second consecutive time, bringing the overnight rate down to 3.25 per cent, the top of the central bank’s neutral range. This decision was made in light of several economic indicators.
- Unemployment Rate: The unemployment rate rose to 6.8 per cent in November, indicating a slower pace of job creation.
- GDP Growth: Third-quarter GDP growth came in at one per cent, which was below the Bank of Canada’s expectations.
- Inflation Rate: The inflation rate had remained at or below two per cent since August.
A Close Call: The Deliberations
"At the outset, each member of governing council acknowledged that the decision was a close call based on their own assessments of the data and the outlook for growth and inflation," the summary said. "Data since the last decision were mixed, with more evidence that household spending was picking up but with a weaker outlook for growth overall."
Members discussed the arguments in favour of a 25-basis-point cut since consumer spending and housing activity were showing signs of strength. They also discussed the merits of a 50-basis-point cut, and the discussion ultimately "coalesced around a consensus" that the economy required a more substantial rate cut.
Factors Influencing the Decision
The governing council members considered several factors when making their decision:
- Monetary Policy: The recent depreciation of the Canadian dollar in recent months and its impact on inflation were also considered by governing council members.
- Exchange Rate: A lower exchange rate makes Canadian exports more attractive in the United States, adding to demand. It also makes imports more expensive, which could feed through to inflation in consumer goods and higher costs of production inputs.
- Uncertainty: Looking ahead to the growth outlook next year, members discussed a new source of uncertainty: the possibility of tariffs being enacted by the incoming U.S. administration.
Implications of the Decision
The decision to cut the policy rate is expected to have several implications:
- GDP Growth: Members believe that the planned reductions in immigration will translate into lower GDP growth than the Bank had forecast in the October Report.
- Interest Rates: The decision may lead to a more gradual approach to monetary policy in the future.
Conclusion
The decision by the Bank of Canada’s governing council members to cut the policy rate by 50 basis points was a ‘close call,’ according to minutes released by the central bank on Monday. The decision was made in light of several economic indicators, including unemployment and inflation rates. The factors influencing the decision included monetary policy, exchange rate, and uncertainty.
The implications of the decision are expected to have an impact on GDP growth and interest rates.
