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A considerable amount of time was spent discussing the potential risks to the inflation and economic outlooks
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After four consecutive months of easing core inflation and indications of further downward momentum in prices, members of the Bank of Canada‘s governing council agreed the time had come to cut rates in June, setting a new direction for monetary policy, minutes of their deliberations released Wednesday revealed.
Council had been divided on the timing of rate cuts prior to its previous interest rate announcement in April, but on June 5 cut the key overnight interest rate by 25 basis points to 4.75 per cent.
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Though they did discuss whether to hold off on a cut until July in order to see additional inflation data, the trend in core inflation, which remained below three per cent, provided enough confidence to go ahead with the June cut.
“Governing Council discussed how the accumulated evidence improved their confidence that progress toward the two per cent target would be sustained,” the statement read. “Members agreed that with further evidence showing that underlying inflation is easing and on a more sustained trajectory toward two per cent, monetary policy no longer needed to be as restrictive and a reduction in the policy rate was appropriate.”
The potential divergence of Canadian monetary policy and U.S. monetary policy and what that would mean for the Canadian dollar was also discussed.
“Members discussed many potential drivers that could affect the exchange rate, including market expectations for monetary policy divergence,” the statement read. “While members agreed there are likely limits to how far monetary policy in Canada can diverge from U.S. policy, the limits were not close to being reached.”
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Despite the central bank’s confidence that the path to the inflation target will remain sustainable, a considerable amount of time was spent discussing the potential risks to the inflation and economic outlooks.
One major downside risk is the large number of households up for mortgage renewals this year, which could dampen consumption. Upside risks include an over-heated housing market brought on by cheaper interest rates, persistent wage growth which could lead to more expensive services, strong population growth putting pressure on shelter prices and a geopolitical situation that is unstable and remains a risk to global supply chains.
Disagreement emerged among members, with some putting more emphasis on risks associated with a weakening Canadian economy and others more focused on the implications of wage growth and an over-heated housing market.
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Members agreed that if inflation remains on track to its target, that further policy rate cuts should be expected.
“Members also agreed that monetary policy easing would likely be gradual given that inflation is forecast to ease toward the target gradually,” the statement read. “The timing of any further reductions in the policy rate would depend on incoming data and its implications for the future path of inflation.”
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