Bank of Canada Governing Council Discussion

OTTAWA, Nov 5 (Reuters) – The Bank of Canada's governing council felt its key borrowing cost was not needed to be as restrictive ahead of its Oct. 23 decision to cut rates, confident that inflationary pressures would decline, minutes showed on Tuesday.

The BoC slashed its key policy rate by 50 basis points to 3.75% last month, marking its fourth consecutive cut and the first larger-than-usual move in over four years, after declaring an almost victory over inflation.

Committee members discussed the merits of a 25 basis point cut but reached a strong consensus for the larger move, suggesting that it was appropriate given the economic data seen since July.

However, there was concern that the larger rate cut might be interpreted as a sign of economic trouble, possibly leading to expectations for further large cuts or assumptions that the policy rate would need to be very accommodative in the future.

Members noted that a larger cut was needed to address the ongoing softness in the labor market and the requirement for stronger economic growth to handle excess supply.

Inflation in Canada eased to 1.6% in September, falling below the bank's mid-point of the 1% to 3% control range, primarily due to high interest rates reducing consumer prices. However, growth has stalled, with GDP stagnating in August and expectations that it would fall short of the BoC’s revised 1.5% target for the third quarter.

The central bank and economists believe that government efforts to curtail population growth will soften GDP and consumption in the following quarters. A slowing rate of population growth is expected to slow total consumption growth, even though lower interest rates would ultimately support stronger consumption growth over time.

Prime Minister Justin Trudeau's government announced measures last month which could lead to a population decline of 0.2% in both 2025 and 2026, before returning to marginal growth in 2027.

The six-member committee also discussed the risk that lower interest rates, pent-up demand, and new mortgage qualification rules could increase demand for housing and unexpectedly boost housing prices.

By Promit Mukherjee, editing by Dale Smith
(promit.mukherjee@thomsonreuters.com)