Bank of Canada worried jumbo rate cut would send sign of ‘economic trouble’
The Bank of Canada’s top decision makers worried the central bank’s oversized interest rate cut in October could send a dour signal about the state of the Canadian economy, according to new documents released Tuesday.
The Bank of Canada delivered a rare 50-basis-point cut to its benchmark interest rate on Oct. 23, the fourth consecutive drop but the largest in 15 years, outside the early days of the COVID-19 pandemic.
That oversized step brought the policy rate down to 3.75 per cent.
But a summary of the governing council’s deliberations from that decision shows worry among some officials that a drop of that magnitude would spark fears about what the central bank thought of the economy’s trajectory and the future path for interest rates.
“Since a 50-basis-point cut is unusual, some members expressed concern that it might be interpreted as a sign of economic trouble, leading to expectations of further moves of this size or to assumptions that the policy interest rate would need to become very accommodative in the future,” the deliberations read.
The Bank of Canada’s policy rate broadly sets the cost of borrowing in Canada. The central bank’s mandate is to keep inflation at two per cent, raising the rate when price pressures are too high and lowering it amid fears a slowing economy could send inflation too far below target.
Sharp drops in the policy rate can imply fears that monetary policy is too tight for the economy to function healthily and that the Bank of Canada is behind the curve, signalling that a steeper economic contraction may be coming.
With inflation falling to 1.6 per cent in September — arriving at target faster than the Bank of Canada had forecast — the governing council indicated it was increasingly
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