Bank of Canada worried jumbo rate cut would signal 'economic trouble,' deliberations show

financialpost.com:

Bank of Canada governing council members expressed concern that a 50-basis-point cut in October would signal “economic trouble” and worried it would lead to expectations of further moves of that size, according to a summary of deliberations released on Tuesday.

In the weeks leading up to the central bank’s decision to cut its policy rate by 50 basis points on Oct. 23, bringing the overnight rate down to 3.75 per cent, the inflation rate fell to 1.6 per cent in September, below the Bank of Canada’s two per cent inflation target. In the same month, the unemployment rate remained high at 6.5 per cent, disproportionately affecting younger job seekers.

“While members considered the merits of cutting the policy rate by 25 basis points, there was strong consensus for taking a larger step,” the summary said. “Members felt increasingly confident that the upside pressures on inflation will continue to decline, so policy did not need to be as restrictive. Further, members felt that a larger step was appropriate given the ongoing softness in the labour market and the need for stronger economic growth to absorb excess supply.”

Economic growth has slowed in the second half of this year, with gross domestic product coming in below the Bank of Canada’s expectations. The central bank’s monetary policy report in October revised its third-quarter growth forecast to 1.5 per cent, but Statistics Canada last week said growth is expected to be just one per cent.

“Overall, members noted that growth in recent months had been slightly below potential, and considerable economic slack remained,” the summary said.

Looking ahead, governing council members expect inflation to stay close to the central bank’s target and for the Canadian economy to grow