Have the rates lowered enough? Some wonder at the Bank of Canada

Recently published documents show that some members of the Bank of Canada wondered last month if the central bank’s benchmark 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 with the counterweight of American customs duties and the reorganization global trade in inflation and the Canadian economy in general.

The Central Bank’s decision occurred only 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 theAceum.

Despite persistent uncertainty, monetary policy officials noted certain signs of economic resilience in Canada before the rate decision.

Interrogation

The deliberations show that some members wondered if the Bank of Canada had already brought enough support To help the economy cross the transition.

The Central Bank has reduced its leading rate seven consecutive times between June 2024 and March of this year in order to stimulate the economy, while inflation seemed to become stable again.

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 pressures on pricescan we read in the summary.

Three scenarios on the table

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.

Randall Bartlett, principal director for the Canadian economy at Desjardins, said in an interview that the fact that the central bank considered a drop in rates at its last meeting suggests that the board of management is leaning in favor of a new softening.

Desjardins expects the Central Bank to lower its key rate at its next meeting in September, with the possibility of new decreases later in the year.

Mr. Bartlett added that the apparent division within the Council simply shows the lack of clarity of economic data as to the need or not to stimulate the economy in the context of customs duties.

There are so many uncertainties at present that it is really difficult to determine what is monetary policy or what is the optimal interest rate level to support the economyhe explained.

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 sharp increase in inflation And that recent surveys with consumers and businesses suggested that inflationary anticipations remained well rooted.

If inflation allows the Bank of Canada to then focus on economic slowdown, there is a certain tendency to provide a little more recovery measuressays Bartlett.

Next decision on September 17th

Monetary policy officials declared during deliberations that the impact of customs duties on consumer prices seemed modest until thenbut that these effects only started to appear in the data.

The members believed, however, that the risks concerning inflation were high given the obvious pressures on underlying inflation and uncertainty surrounding the possible effects of customs duties and commercial disturbances on the Canadian economy over timecan we read in 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.