The Bank of Canada is carefully weighing both upside and downside risks to the economy as it attempts to calibrate the pace of interest rate cuts, according to a summary of its deliberations released on Wednesday.

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The deliberations that led to the central bank’s September rate cut took place several weeks before Statistics Canada’s Tuesday inflation report, which showed that the consumer price index rose at an annualized pace of just two per cent in August, effectively hitting the Bank of Canada’s target.

They showed the central bank’s governing council weighed two scenarios during their meetings prior to cutting the policy rate by 25 basis points to 4.25 per cent on Sept. 4.

The upside risk scenario addressed the possibility that rate cuts would spur housing activity, leading the economy to rebound faster than anticipated.

“The housing market could strengthen quickly, boosting house prices and shelter price inflation, and persistently elevated wage growth relative to productivity growth could prop up inflation in other services,” the summary read. “In this scenario, it may be appropriate to slow the pace of further cuts in the policy rate.”

The downside scenario, on the other hand, has been the bigger worry for the central bank in recent months. The governing council fretted that the economy and employment might not pick up as anticipated and that consumption and investment will continue to weaken. In that case, members thought it would be “appropriate to lower the policy interest rate more quickly.”

Bank of Canada Governor Tiff Macklem has left the door open for steeper cuts, if growth does not pick up.

The unemployment rate in Canada is 6.6 per cent, and while growth did exceed the bank’s forecast for the second quarter at 2.1 per cent, preliminary data from Statistics Canada suggests the economy began to stall in June and July of this year.

“Members agreed this posed some downside risk to the forecast that growth would pick up later in the year,” the summary read. “Governing Council members agreed they would like to see the economy grow at a rate above potential output to begin taking up slack in the Canadian economy so that inflation does not fall too much and instead settles close to the two per cent target.”

The bank also discussed whether a level of caution among households is what’s contributing to weakness in consumption and housing.

“The household savings rate remained well above pre-pandemic levels, suggesting consumers could be waiting for lower interest rates to make large purchases or enter the housing market, or they were saving in preparation for higher mortgage payments at renewal,” the summary read.

Economists are predicting the bank will go faster in cutting rates, with the markets predicting a 50 per cent chance of a 50 basis point cut at the central bank’s next meeting in October.

• Email: jgowling@postmedia.com

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