By David Ljunggren
OTTAWA, July 29 (Reuters) - Ahead of the Bank of Canada's July 15 interest rate decision, governors were split over the sustainability of the economic recovery, minutes of the meeting showed on Wednesday.
The bank left its benchmark overnight rate unchanged at 2.25% and predicted the economy would grow by 2.5% on an annualized basis in the second quarter after grinding to a halt in the first quarter.
"Governing Council was confident about the rebound in GDP growth in the second quarter.
But there was a range of views among Governing Council members about the sustainability of the rebound beyond the near term," the minutes said.
"Members agreed they would need to monitor the data closely for signs that growth was broadening as projected."
Among the possible reasons for disappointing growth were the failure of businesses to continue to adapt to U.S. tariffs, a stalled housing market in Toronto and Vancouver, fading consumer resilience and exports and business investment remaining flat, members said.
The bank, which targets 2% inflation, says it will look through the direct effects of higher oil prices. Governors noted there was limited evidence that higher oil prices were spilling over to the prices of other goods and services.
"But the longer oil prices remain elevated, the bigger the risk that their inflationary effects broaden. Members agreed to reiterate in their communications that they would not let higher oil prices lead to persistent inflation," the minutes said.
Some members were concerned about signs of upward drift in medium-term inflation expectations, but all agreed longer-term inflation expectations remained well anchored.
The combination of the Middle East conflict and U.S. trade policy is complicating the bank's job. If it hikes rates to counter the effect of higher oil prices it could hurt the economy but if it cuts rates to boost growth that could trigger a spike in inflation.
"Overall, after a period of weak growth and a spike in inflation, growth was resuming and inflation was easing. Members agreed that this meant the trade-off facing monetary policy had diminished," the minutes said.
"However, uncertainty was still high."
(Reporting bu David Ljunggren, editing by Fergal Smith)
((Reuters Ottawa editorial; david.ljunggren@tr.com))
Keywords: CANADA CENBANK/
