Bank of Canada saw risk of weak 2025/6 consumer spending -minutes
Adds economist comment in paragraph 10
By Promit Mukherjee and David Ljunggren
OTTAWA, Aug 7 (Reuters) -Ahead of their decision to cut rates last month, Bank of Canada governors fretted that consumer spending in 2025 and 2026 could be significantly weaker than expected, minutes of the meeting released on Wednesday showed.
The bank lowered its key overnight rate by 25 basis points to 4.5% on July 24, its second cut in as many months, and indicated it was increasingly concerned about the chances of weaker-than-expected growth.
Rates hit a 23-year high of 5% last year as the bank struggled to contain inflation.
"There is a risk that consumer spending could be significantly weaker than expected in 2025 and 2026 given the number of households likely to be renewing their mortgage at higher rates," the minutes said.
Most Canadian mortgages have a five-year term. Roughly C$300 billion ($218.4 billion) worth of mortgages are up for renewal over the next year at much-higher rates, prompting economists to fret about the hit to growth.
A dismal job report last week from the U.S. reignited worries of Canada's biggest trading partner slipping into a recession, which knocked shares and pulled down bond yields to multi-month lows.
This prompted money markets to fully price in bets of a third consecutive rate cut in Canada next month, from just over 60% last week. Investors are pricing in two more rate cuts this year. 0#BOCWATCH
The bank said lower borrowing costs could boost consumer expenditure, "but many households will still face significant debt-servicing costs" which could dampen a rebound in consumer spending for the next couple of years.
Economic growth was slower than population growth which has led to an excess supply in the economy and slack in the labor market, it said. This could lead to further weakness in the labor market and hurt consumption, putting downward pressure on growth and inflation.
"While upside inflation risks cannot be brushed aside, downside growth risks are becoming more prominent, suggesting that the need for restrictive monetary policy is waning, and rates can move toward neutral," Benjamin Reitzes, Managing Director, at BMO Capital Markets wrote in a note.
Governing council members "agreed to clearly communicate that they would be weighing the forces that could pull inflation below the target against those that could hold it above the target," the minutes said.
The six-member council said there was clear consensus that it would be appropriate to lower the policy rate further if inflation continued to ease in line with projections.
($1 = 1.3738 Canadian dollars)
Reporting by Promit Mukherjee and David Ljunggren in Ottawa; Editing by Aurora Ellis
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