BOC: July Deliberations Cite Need For "More Clarity" Before Deciding On Cuts

The summary of the BOC's deliberations of the July monetary policy decision (link) showed some disagreement among members about the economic outlook and the appropriate policy response, best summed up with "given the uncertainty around estimates of slack and underlying inflation, and how households, businesses and governments will adapt to tariffs, members agreed they would need to wait for more clarity before drawing firm conclusions."

• Governing Council debated whether to cut 25bp, which is no surprise. While they ultimately held rates, the debate was between:
  • "some members" who "held the view that, having reduced the policy interest rate to the middle of the Bank’s estimated range of the neutral interest rate, and the economy showing some resilience to US tariffs, the Bank may have already provided sufficient support to aid in this transition....there was a risk that further easing might take effect only as demand was recovering, which could add to price pressures."
  • and "others " who "highlighted that further monetary policy support would likely be needed given the estimated amount and persistence of slack in the economy, particularly if the labour market softened further. If incoming data showed that the upside risks to underlying inflation were not materializing, there could be more room for monetary policy to ease further, reducing economic slack and supporting the economy’s adjustment to the reconfiguration of global trade."
• The document notes that inflation was a focus ("Discussions about different indicators of inflationary pressures, and the trajectory for headline inflation, occupied much of the deliberations.") and ultimately "Members agreed that the degree of firmness in underlying inflation was an important consideration for the policy decision....members assessed underlying inflation to be around 2½% recently, up from around 2% in the second half of last year."
• Looking forward they didn't sound particularly concerned about the inflation outlook. While "the impact of tariffs on consumer prices appeared to be modest so far. They also noted that wage increases and unit labour costs had continued to ease and the recent appreciation of the Canadian dollar had reduced import prices. There were no signs that inflation expectations had become de-anchored. Moreover, none of the three tariff scenarios suggested a sharp rise in inflation." However "members judged the risks to inflation to be elevated given evident pressures on underlying inflation and the uncertainty around the impacts that tariffs and trade disruptions could have on Canada’s economy over time".
• There was "considerable" discussion about "how households, businesses and governments will react and adapt to tariffs", but to sum up, "members agreed that it was still too early to assess how tariffs and the rewiring of trade would affect economic activity and inflation in Canada."
• There was little market reaction to the release, which in any case captured deliberations that occurred before a weak July labour market report. Futures markets currently price a September rate cut at 33% probability, with a full 25bp cut nearly priced through the end of the year (24bp Dec).