Bank of Canada policymakers believe that inflationary risks to Canada’s economy may have diminished, but are not entirely gone, according to a summary of the governing council’s most recent deliberations released on Wednesday.

“Members stressed that while the upside risks had diminished, they had not gone away,” the summary said. “Trade disruptions implied new costs. How big these costs would be, when and where they might materialize, and what they could mean for

inflation all remained uncertain .” The deliberations came in the lead-up to the central bank’s decision to

cut its interest rate to 2.5 per cent on Sept. 17, the first trim since March of this year. Bank of Canada governor

Tiff Macklem said inflationary pressures had diminished and the focus had turned to a weakening Canadian economy.

The minutes showed the central bank’s governing council had weighed keeping the policy rate at 2.75 per cent, but ultimately chose to cut based on a softening

labour market , a reduction in upward pressure on core inflation and Prime Minister Mark Carney’s decision to remove

retaliatory tariffs on billions of dollars worth of U.S. goods. The Canadian economy contracted by 1.6 per cent in the second quarter and exports fell by 27 per cent. The labour market has also faced headwinds, with the

unemployment rate reaching 7.1 per cent in August, and employment declining by 100,000 jobs in July and August.

Policymakers at the central bank also acknowledged that U.S. tariffs are causing structural changes to demand and supply, which makes it difficult to assess the amount of slack in the economy.

The governing council also remained concerned that ongoing uncertainty from U.S. trade policy could lead to further labour market weakness across the economy and low business investment. This uncertainty is expected to continue as trading partners prepare for a review of the

Canada-United-States-Mexico-Agreement (CUSMA) next year. The discussions also highlighted slowing population growth as another factor that will continue to weigh on growth moving forward.

Members of governing council also stressed that the inflation outlook was subject to more uncertainty than usual, because even with the removal of retaliatory tariffs, the economy could still face rising costs due to changes to global trade.

“The reconfiguration of Canada’s trading architecture meant the economy would be working less efficiently, adding costs,” the summary said. “Also, tariffs on imports into the United States could spill over into greater price pressures in Canada, given that many goods from other countries transit through the United States before arriving in Canada.”

Members agreed to proceed “carefully” in adjusting the bank’s monetary policy stance, as it weighs downside risks to the economy and upside risks to inflation.

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“They also agreed they would continue to look over a shorter horizon than usual and take a risk management approach,” the minutes said. “They recognized there were risks on both sides and agreed they would be ready to respond to new information.”

Policymakers were also confident that given the relative stability of U.S. tariffs, the central bank will be able to present a baseline projection for growth and inflation in its next monetary policy report on Oct. 29. The Bank of Canada has opted not to present a baseline projection since the trade war with the U.S. erupted earlier this year, instead presenting a series of possible scenarios in its recent monetary policy reports.