Bank of Canada Officials Believed They Could Be Patient on Rate Cuts, Minutes Say

By Paul Vieira

OTTAWA--Senior Bank of Canada officials mulled a smaller quarter-point cut this month, arguing they could be patient amid encouraging signs that previous rate cuts are starting to spur a spending recovery, according to minutes released Monday by the central bank.

Instead, the six members of the Bank of Canada's governing council opted for a second straight half-point cut, to 3.25%, given that the growth outlook had weakened and a belief that rates were in restrictive territory, the minutes said. The central bank's estimate for the neutral rate, or when policy neither slows nor speeds up economic activity, is in a range between 2.25% and 3.25%.

Officials "acknowledged that not all the recent data pointed to the need for a 50 basis-point cut" on Dec. 11, said the minutes, which summarize deliberations among senior officials that started on Dec. 6. "However, it seemed unlikely that a cut of 50 basis points would take rates lower than they needed to go over the next couple of meetings."

The Bank of Canada has been at the forefront among Group of Seven monetary authorities in reversing rate increases aimed at taming inflation. Canada's central bank has cut rates five times, for a total reduction of 1.75 percentage points since June.

Heading into the Dec. 11 decision, economists believed a half-point cut was in the cards, given weak employment data for November and a sharp slowdown in growth in the third quarter. The decision, delivered by Gov. Tiff Macklem, also indicated that any further rate cuts would be done on a gradual basis.

The minutes said officials believed there were "encouraging" details in the data measuring gross domestic product in the third quarter, in particular, that rate cuts had started to translate into higher household spending. That was offset by two policy developments since October: the Canadian government's decision to sharply reduce the intake of immigrants; and uncertainty among business leaders about the possibility of a 25% tariff on Canada's U.S.-bound exports from President-elect Donald Trump.

Central bank officials "expressed concern that the uncertainty created by the incoming U.S. administration's threat to impose tariffs on Canadian exports would weigh on the investment climate," the minutes said, adding that business investment was "considerably weaker" in the third quarter than anticipated.

As for immigration, Bank of Canada officials agreed the planned reductions in immigration intake would lead to lower GDP growth than previously forecast, the minutes said. The central bank had forecast in October that GDP in Canada would grow 2.1% in 2025.

The fear for the central bank is that it could take longer for slack, or spare capacity, to be absorbed. The Bank of Canada has said growing slack is putting downward pressure on prices, and removing slack is essential to keep inflation at or near 2%.

"Based on new data since October, members were generally more confident in the recovery in per capita spending and housing. But they agreed that the overall growth outlook was now softer than in October," the minutes said.

Write to Paul Vieira at paul.vieira@wsj.com