Weaker economy, end to some retaliatory tariffs caused Bank of Canada cut: summary

A weakening economy and the removal of most retaliatory tariffs helped convince the Bank of Canada that a cut to its key policy rate was warranted.

The Bank of Canada released its summary of deliberations on Oct. 1 from the meeting ahead of its Sept. 17 decision to cut its benchmark rate by a quarter-percentage point to 2.5 per cent.

“In reviewing all these factors, governing council judged that the balance of risks had shifted in favour of cutting the policy rate. The economy was weaker and, while there were still some mixed signals, inflationary pressures appeared more contained,” the summary reads.

The central bank said it considered holding the rate steady but there were three determining factors in favour of a lower rate. Those were a weakening economy with a softening labour market, signs that pressure on core inflation could be easing and the removal of most retaliatory tariffs by the federal government.

The summary noted that the economy contracted in the second quarter as tariffs and trade uncertainty took a toll.

Real gross domestic product declined 1.6 per cent on an annualized basis in the second quarter, Statistics Canada data showed, driven by a sharp drop-off in exports and business investment.

“Businesses reported that they are in a wait-and-see mode, given the unpredictability of U.S. trade policy,” the summary said.

During the central bank’s deliberations, it also weighed the latest inflation figures, released a day before its rate announcement.

Statistics Canada reported annual inflation rose to 1.9 per cent in August. This was up from 1.7 per cent in July but short of economists’ expectations for two per cent heading into the release.

The acceleration in headline inflation was near expectations and core metrics — closely watched because they strip out volatility — did not show signs of creeping higher.

“Governing council members agreed that the latest inflation data indicated that upward momentum in core inflation seen earlier in the year had dissipated,” the summary said.

While members agreed upside risks to inflation had diminished, they stressed those risks had not “gone away.”

“Trade disruptions implied new costs. How big these costs would be, when and where they might materialize, and what they could mean for inflation all remained uncertain.”

The central bank’s governing council also noted that the federal government’s decision to remove most retaliatory tariffs in September on imported goods from the U.S. would result in less upward pressure on the cost of those items.

The deliberations also said that due to the “relative stability” since July regarding the U.S.-Canada tariff situation, governing council members expect to present baseline projections for growth and inflation in the upcoming monetary policy report in October.

That would mark a change from its two previous monetary policy reports this year where it offered multiple scenarios rather than an economic forecast.