MNI: BOC Discussed Terminal Rate, Uncertain On Neutral-Minutes

MNI (OTTAWA) - Bank of Canada officials discussed the terminal point for interest-rate cuts in this cycle before the decision two weeks ago to lower borrowing costs half a percentage point, minutes from those meetings published Tuesday showed.

"Members shared perspectives about how much more the policy rate would need to be reduced," the Summary of Deliberations said, without much elaboration on where Governing Council members stood. Officials were also uncertain about where the neutral rate lies, though staff estimates have put that in a range centered on 2.75%.

The Bank cut half a point to 3.75% on Oct. 23 and said more reductions can be justified with inflation forecast staying close to the 2% target. Governor Tiff Macklem told lawmakers last week he could go another half point if needed and officials will act on a meeting-by-meeting basis. Before the last move there were three straight quarter-point reductions. 

Discussions showed caution about feeding bets that one jumbo rate cut meant more are coming. Moves exceeding a quarter point have little precedent outside of a major disruption in the era of fixed meeting dates that began in 2000. "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," the minutes said. (See: MNI INTERVIEW: BOC Justified To Cut 50BPS More In Dec-Kronick)

SHIFTS IN CONFIDENCE

The minutes showed more confidence the inflation fight had largely been won after a three-year battle to bring it down from 8%. The policy rate jumped from near zero to the highest since 2001 at 5% before the BOC led the G7 on cuts earlier this year. Officials cited core inflation below 2.5%, fewer above-average price increases and tamer price expectations. 

"Members were more confident that sources of upward pressure, particularly shelter costs, would ease," the report said.

Officials showed misgivings that a soft economy will keep inflation that's now 1.6% a bit soft. "Growth was looking a little slower through the second half of the year, and the timing of the expected pickup in growth was uncertain. If growth did not rise above potential growth, excess supply could persist in pulling inflation lower."