Bank of Canada divided on impact of monetary policy given tariffs, say minutes

By Promit Mukherjee and David Ljunggren

OTTAWA, Aug 13 (Reuters) - Ahead of the Bank of Canada's July 30 interest rate decision, governors were divided on how much monetary policy could aid growth under current economic conditions, minutes of the meeting showed on Wednesday.

The BoC kept its key policy rate unchanged at 2.75% for the third time in a row but said it could cut rates if the economy weakened as a result of U.S. tariffs and inflationary pressures were kept under control.

"Monetary policy works to control inflation by influencing demand and is not well suited to shocks that push prices up because of a decline in aggregate supply," said the minutes.

"In this context, there was some debate about what monetary policy could do to support the economy."

The bank said the worst case tariff scenario had not transpired and noted there were no signs inflation expectations were becoming de-anchored.

The minutes showed some members of the seven-person rate-setting team felt the BoC might have already provided all the support it could by bringing the rates to the middle of its so-called neutral range.

The neutral rate is the point where the key rate is just enough to not stimulate or restrict economic growth, and the bank estimates this rate to be within the 2.25% and 3.25% range.

"Given the lagged effects of monetary policy, there was a risk that further easing might take effect only as demand was recovering, which could add to price pressures," the meeting noted.

But others believed that more support would likely be needed "given the estimated amount and persistence of slack in the economy, particularly if the labor market softened further".

Members agreed the spillovers from lower export demand into business investment, employment and household spending had been limited so far. The BoC also discussed how much government spending could partially offset tariff-led weakness.

But given the uncertainty and the path of trade negotiations between the U.S. and Canada, they would need to wait to draw firm conclusions on how the economy and inflation would evolve, forcing them to look "over a shorter horizon than usual."

The bank's next rate decision will be on Sept. 17. Money markets see the odds of another pause are roughly 67% since most analysts and economists think the worst impact of tariffs on the Canadian economy is likely over.

(Reuters Ottawa editorial)

Keywords: CANADA CENBANK/