Bank of Canada Concerned Large Rate Cut Might Signal ‘Economic Trouble,’ Meeting Notes Reveal

The Bank of Canada’s governing council voiced concerns that a 50-basis-point rate cut in October might signal “economic trouble” and lead to expectations of additional large cuts, according to a summary of their recent deliberations.

Ahead of the decision to reduce the policy rate by 50 basis points on October 23, lowering the overnight rate to 3.75 percent, Canada’s inflation rate fell to 1.6 percent in September—below the central bank’s 2 percent target. At the same time, the unemployment rate remained elevated at 6.5 percent, with young job seekers disproportionately affected.

“While members considered a 25-basis-point cut, there was a strong consensus for a larger step,” the summary stated. Council members felt more confident that inflationary pressures would continue easing, suggesting that a highly restrictive policy was no longer necessary. They also deemed a larger cut appropriate due to persistent labor market softness and the need for more robust economic growth to address excess supply.

Economic growth has slowed over the latter half of the year, with gross domestic product trailing the Bank of Canada’s earlier projections. The central bank revised its third-quarter growth forecast to 1.5 percent in its October monetary policy report, though Statistics Canada recently projected growth of only 1 percent.

“Overall, members noted that recent growth was slightly below potential, and that there was significant economic slack,” the summary noted.

Looking forward, the governing council anticipates inflation will remain close to the central bank’s target, with the Canadian economy projected to grow by 2.1 percent in 2024. Members also discussed the potential impact of slower population growth, expected next year, on consumption and economic expansion. Their discussions, however, predated the federal government’s announcement to cut newcomer admissions by 21 percent in 2025, with Statistics Canada now forecasting a potential population decline over the next two years—below initial central bank estimates.

In response to this policy shift, Bank of Canada Governor Tiff Macklem said officials will monitor population growth trends closely, adjusting forecasts as more clarity emerges.

Council members remain optimistic that lower interest rates could bolster consumption growth and ease the burden of high mortgage rates for households. However, they acknowledged that it may take time for rate cuts to significantly influence per-capita spending.

“They also recognized the uncertainties around both population growth and the speed at which lower interest rates would drive spending, making it challenging to pinpoint when consumption would noticeably pick up,” the summary added.

The council agreed to take a meeting-by-meeting approach to rate decisions, emphasizing reliance on incoming data amid ongoing uncertainty around the ideal neutral rate target.