By Paul Vieira
OTTAWA-Bank of Canada officials worried about the risk of a yearslong slump in consumer spending due to signs that labor-market weakness would persist and pending mortgage renewals at higher rates, according to a summary of their deliberations leading up to a July rate cut.
The Bank of Canada delivered a second straight quarter-point rate cut in July, taking its policy rate to 4.5%, and signaled more reductions are in the offing because economic slack, or spare capacity, has increased. Gov. Tiff Macklem told reporters last month that downside economic risks are "taking on increased weight in our policy deliberations."
Since the July decision, forecasting firms have penciled in additional reductions for Canadian rates, amid weakening U.S. economic data and remarks from Federal Reserve officials about the start of rate cuts in the fall.
The central bank's minutes, covering discussions among senior policymakers beginning July 16, indicate there was "considerable time" spent discussing the cooling in labor-market conditions, with the unemployment rate in June reaching a 29-month high of 6.4%. The economy is still adding net jobs, but at a markedly slower pace relative to immigration-fueled growth in the labor force.
As a result, "members agreed that slack in the labor market was expected to persist," according to the minutes. "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 labor market, downside risks to the outlook for inflation had also increased."
Some economists have warned the central bank might need to deliver deep cuts to revive activity, noting that hundreds of billions of dollars in mortgages are coming up for renewal through this year and next at sharply higher rates.
"There is a risk that consumer spending could be significantly weaker than expected in 2025 and 2026 given the number of households" that face mortgage renewals, according to the minutes. Unlike the U.S., Canadian lenders tend to issue mortgages on shorter terms, generally five years.
"With the emergence of slack in the labor market, some members expressed concern that further weakness in the labor market could delay the rebound in consumption, putting downward pressure on growth and inflation," according to the minutes.
The Bank of Canada was the first Group of Seven central bank to reduce its policy interest rate in June, and with July's cut and messaging it looks positioned as a leader among large developed-world authorities in terms of rolling back a rapid rise in borrowing costs to tame historically high inflation. Canada's elevated interest rates have dampened activity, as the country's households hold some of the highest levels of debt in the developed world, when measured as a share of gross domestic product.
Inflation has remained under 3% for six straight months. The minutes indicated officials were "increasingly confident" that reaching their 2% inflation target was within reach, and "expressed that a pickup in economic growth was needed to sustainably achieve the inflation target over the projection horizon," which runs through 2026.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
08-07-24 1347ET
