(Ottawa) Recently published documents show that some members of the Banque du Canada wondered last month if the central bank interest rate was already low enough to support the Canadian economy despite American customs duties.
The Bank of Canada published on Wednesday the summary of the deliberations of meetings which led to its decision of July 30 to maintain its key rate at 2.75 %.
This report shows that the Central Bank management board was concerned about the impact of American customs duties and the “reorganization” of world trade in inflation and the Canadian economy in general.
The Central Bank’s decision only occurred a few days before US President Donald Trump notes customs duties on Canadian products at 35 %, while maintaining an exemption for products in accordance with ACEUM.
Despite persistent uncertainty, monetary policy officials noted certain signs of economic resilience in Canada before the rate decision.
The deliberations show that some members wondered if the Bank of Canada had already provided “enough support” to help the economy cross the transition.
The Central Bank has reduced its master rate on seven consecutive times between June 2024 and March of this year in order to stimulate the economy, while inflation seemed to return under control.
Economists claim that the impact of a monetary policy decision tends to be felt for a year or more after its implementation, so that many of these rate drops are only starting to stimulate the economy.
With this in mind, the Bank of Canada’s Bank Board wondered if a drop in rates at present, while the economy is straightening up, would not end up fueling inflation in the long term.
“As monetary policy acts with a discrepancy, the effects of additional softening could be felt only when demand is straightening, which could accentuate the pressures on prices”, can be read in the summary.
Certain forecasters, whose royal bank, do not provide for other rate reductions in their reference scenarios.
Other members of the Bank of Canada Directorate’s Council estimated that signs of slowing down the economy could justify new rate drops, especially if the labor market was starting to show more weakness.
If the upcoming data showed that inflation was not too far from the 2 % target set by the central bank, a drop in the key rate may prove necessary, made these members during the deliberations.
In addition to its decision on rates, the Banque du Canada presented three scenarios concerning the evolution of the tariff situation in the United States: one in which the status quo persists, one in which commercial restrictions are diminishing and another in which customs duties increase.
The board of management noted that none of these scenarios provided for “a strong increase in inflation” and that recent surveys with consumers and businesses suggested that inflationary anticipations remained well anchored.
The monetary policy officials declared during the deliberations that the impact of customs duties on consumer prices “seemed modest until then”, but that these effects were only beginning to appear in the data.
“The members believed, however, that the risks concerning inflation were raised given the obvious pressures on underlying inflation and uncertainty surrounding the possible effects of customs duties and commercial disturbances on the Canadian economy over time,” said the summary.
The Bank of Canada will examine inflation figures for July and August before making its next interest in interest rates on September 17.