EconoFACTS

August 07, 2024 | 14:07

BoC Summary of Deliberations (July 24) — Balancing Act

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

The Bank of Canada's Summary of Deliberations (minutes) from the July 24 policy meeting reinforced the dovish turn. Recall that the Bank cut rates by 25 bps for a second consecutive meeting and highlighted that it is now also focusing on downside growth risks. The minutes provided some additional colour on those thoughts...

On the downside risks to growth:

"In July, with core and CPI inflation within the control range for several months, and with inflation moderating and forecast to ease toward the target, members agreed they now needed to be as focused on the downside risks as the upside risks. With more excess supply in the economy and slack emerging in the labour market, downside risks to the outlook for inflation had also increased."
"There is a risk that consumer spending could be significantly weaker than expected in 2025 and 2026 given the number of households likely to be renewing their mortgage at higher rates. With the emergence of slack in the labour market, some members expressed concern that further weakness in the labour market could delay the rebound in consumption, putting downward pressure on growth and inflation."

On inflation worries:

"Regarding the forces pulling inflation up, members focused on the stickiness of services price inflation."
"...price pressures in services that are more closely affected by wages were unlikely to be offset to the same extent as in past months by disinflation in goods or price decreases in services such as telecommunications."

Worries about a resurgence in the housing market appear to have eased:

"...concerns had decreased that pent-up demand would lead to a sudden rise in house prices with cuts in the policy interest rate."

The Bank's increased focus on growth risks, rather than just inflation upside, was the key shift at the July meeting. Given the already sizeable output gap, the BoC realizes that if growth disappoints, inflation could slow more than expected over the forecast horizon. At present, the Bank is forecasting growth to pick up on the back of firming consumption and housing, but a slackening labour market is creating increased risk around that call. On the plus side, it's a straightforward path to getting consumers to spend and housing activity to improve: rate cuts.

Key Takeaway: The Bank of Canada remains on a clear path to further rate cuts amid a sizeable output gap, generally lacklustre growth outlook, and increasing labour market slack. While upside inflation risks cannot be brushed aside, downside growth risks are becoming more prominent, suggesting that the need for restrictive monetary policy is waning, and rates can move toward neutral.