This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on April 10, 2024.
This summary reflects discussions and deliberations by members of Governing Council in stage three of the Bank’s monetary policy decision-making process. This stage takes place after members have received all staff briefings and recommendations.
Governing Council’s policy decision-making meetings began on April 2. The Governor presided over these meetings. Members in attendance were Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Sharon Kozicki, Nicolas Vincent and Rhys Mendes.
The international economy
Governing Council began its deliberations by discussing the outlook for the global economy. Growth was projected to be stronger than previously expected in 2024 and 2025. The US economy accounts for a substantial portion of the increase. Growth in the euro area had remained weak but was expected to pick up gradually this year. China’s economy was expected to face headwinds due to subdued consumer confidence and continued weakness in the property sector. Governing Council members expected inflation to continue to ease gradually in most major economies, although with some unevenness across countries.
Members focused their discussion on the significant upward revision to the projection for growth in the United States. Consumption in the United States had been repeatedly stronger than expected. Strength in US consumption was being supported by tight labour market conditions, accumulated wealth and easing financial conditions. They agreed that there was a risk that US GDP growth could again prove stronger than expected in 2024. Strong income growth stemming from a resilient labour market and the wealth effect from the sharp increase in US equities could boost consumption more than projected. They also considered the possibility that government incentives could further strengthen investment and contribute to this upside risk. If domestic demand and strong wage growth do not moderate, lowering inflation further could prove more difficult, particularly in services.
International financial conditions had continued to ease since the January Monetary Policy Report, as the global economic outlook improved, and the risk of a recession diminished. Equity markets in most advanced economies had strengthened further as market perceptions of the risk of a recession diminished. Corporate credit spreads had narrowed to levels not seen since before the 2008–09 global financial crisis. While bond yields had risen since January, overall financial conditions had eased. Global oil prices were about $5 stronger than assumed in January, partly driven by increasing geopolitical risks. The spread between prices of West Texas Intermediate and Western Canadian Select oil had narrowed recently in anticipation of the start of operations of the Trans Mountain Expansion project.
The Canadian economy and inflation outlook
Governing Council reviewed developments in the Canadian economy and recent data on inflation. After stalling in the second half of 2023, economic growth was expected to strengthen in early 2024. The sizable upward revision to projected growth in the first half of this year is largely supported by stronger-than-expected population growth.
Inflation had eased to 2.8% in February and was projected to remain around 3% in the first half of 2024, broadly in line with the forecast in the January Report. Inflation was expected to ease to below 2.5% in the second half of the year, reaching the target in 2025.
The Bank had also reassessed potential output and revised up the estimate for 2024 due to higher population growth. With both GDP and potential output growing at roughly the same rate in 2024, the economy was expected to remain in excess supply through the year. The output gap was expected to begin narrowing in 2025 as GDP growth picks up slightly and potential output growth slows due to lower population growth in 2025 and 2026.
Members discussed in detail the impact of population growth on their outlook. They agreed that the rapid increase in the population, as well as the future decline in the share of non-permanent residents announced by the federal government, complicated the outlook for economic activity and inflation. While GDP per capita was forecast to pick up through 2024, it was still expected to be negative in the first half of the year. However, stronger population growth was pushing up total spending, so overall GDP growth was expected to be solid. In the second half of the year, as population growth is expected to slow, per capita spending is expected to pick up as business and consumer confidence improve, financial conditions ease and the effects of past interest rate increases wane.
Since population growth adds to both supply and demand in the economy, the impact on inflation will likely vary across components of the consumer price index (CPI). Governing Council members agreed that, given the existing imbalance in the supply of and demand for housing, and the fact that an expansion in housing supply takes time, the increase in population added to the short-term pressure on shelter inflation, including rent and components linked to housing prices.
Members also discussed other factors that would contribute to a rebound in growth in 2024:
- The strong US economy was increasing demand for Canadian exports.
- Spending plans by provincial governments tabled since the January Report would contribute more to growth starting in the second quarter of 2024.
- Business investment, which had been very weak in the second half of 2023, was expected to recover gradually in 2024.
Governing Council viewed the March Labour Force Survey as consistent with the recent trend in labour market indicators:
- Job gains had continued to be lower than growth in the working-age population.
- The job vacancy rate had declined to near pre-pandemic levels.
- The unemployment rate ticked up to 6.1% in March, which was a bit higher than pre-pandemic levels.
- Wage growth had begun to show signs of easing, and productivity growth showed early signs of improving. Growth of real unit labour costs had come down but remained elevated. Productivity growth would need to increase substantially for wage growth at current levels to eventually be compatible with the 2% inflation target.
Governing Council spent considerable time discussing recent data on inflation. Members were encouraged by the recent progress on CPI and core inflation. CPI-trim and CPI-median had eased to just above 3% in February. Three-month measures had also declined below the 12-month rates, suggesting downward momentum.
Members assessed subcomponents of the CPI basket to help them gauge where inflationary pressures remained.
- Inflation from goods excluding food and energy had declined broadly to about its historical average.
- Inflation from food in stores and energy also eased to more normal levels.
- Inflation in services excluding shelter had been below its historical average since the third quarter of 2023, largely due to a sharp fall in communications prices, which was unlikely to be repeated. However, excluding communications prices, the breadth of price pressures in services was viewed as an upside risk to inflation, particularly given uncertainty around the future path of wage growth.
- Shelter price inflation continued to be the largest contributor to CPI inflation.
Overall, Governing Council members were confident that their outlook for inflation was reasonably balanced, with core inflation measures expected to continue to ease gradually. However, with higher global oil prices, total CPI was expected to bounce around 3% over the next few months, before easing to below 2.5% in the second half of the year.
Considerations for monetary policy
Members continued their discussion from previous meetings about the conditions they needed to see to be confident that inflation was on a sustainable track to the 2% target.
They reviewed the key indicators they had been watching to assess the trajectory of underlying inflation.
- On the balance between demand and supply, members were more confident that, with excess supply persisting through the year, inflationary pressures would continue to ease even as growth picked up.
- They agreed that corporate pricing behaviour was normalizing. Analysis of CPI micro data demonstrated that firms were raising their prices less frequently, consistent with the findings of the Bank’s surveys.
- Businesses’ inflation expectations had continued to come down and were in line with the Bank’s outlook. Members viewed the inflation expectations of businesses as an indicator of future inflation because businesses tend to be forward-looking when they set prices. Consumers’ inflation expectations were thought to be more reflective of their recent past experience with inflation.
- While wage growth remained elevated in relation to productivity growth, members acknowledged that it tends to lag labour market activity. Wage growth should ease gradually in the coming quarters, given cooling labour market conditions.
Governing Council viewed progress on all these indicators as favourable for the likely path of underlying inflation.
Members then discussed when they might be confident, or how much assurance they needed, that inflation was sustainably on track to reach the 2% target, and when the conditions would be in place to start reducing the restrictive stance of monetary policy.
Some members emphasized that, with the economy performing well, the risk had diminished that restrictive monetary policy would slow the economy more than necessary to return inflation to target. Additionally, stronger domestic demand, coupled with robust US growth, could keep core inflation from slowing further, or it could even pick up again in the event of new surprises. They felt more reassurance was needed to reduce the risk that the downward progress on core inflation would stall, and to avoid jeopardizing the progress made thus far.
Others placed more emphasis on the progress made in bringing inflation down. Inflation across most goods and services had come down significantly. The distribution of inflation rates across components of the CPI had approached normal, despite some outsized price increases and decreases in certain components. Coupled with indicators that the economy was in excess supply and with a base case projection showing the output gap starting to close only next year, they felt there was a risk of keeping monetary policy more restrictive than needed.
In assessing timing considerations, Governing Council discussed some of the risks to the outlook for growth and inflation.
As in past meetings, members discussed the risk that housing market activity could accelerate and further boost shelter prices. Members acknowledged that easing monetary policy could increase the likelihood of this risk materializing, regardless of when the easing cycle begins. Governing Council members also discussed mortgage interest costs, and how they should be treated from a monetary policy perspective. They agreed that focusing on the Bank’s preferred measures of core inflation allowed them to effectively look through mortgage interest costs. CPI-trim symmetrically filters out extreme price movements at both the bottom and top of the distribution of price changes. Mortgage interest costs had thus been excluded from CPI-trim in almost every month over the past two years. However, CPI-trim had still captured other shelter services prices, such as rent, which are more reflective of demand for and supply of housing.
Members also discussed the path of population growth. The projection incorporated continued strong population growth in the first half of 2024 followed by much softer growth, in line with the federal government’s target for reducing the share of non-permanent residents. But details of how these plans will be implemented had not been announced. Governing Council recognized that there was some uncertainty about future population growth and agreed it would be important to update the population forecast each quarter.
Overall, Governing Council agreed that inflation was still too high. While members were still more concerned about the upside risks to the inflation outlook, they viewed both the upside and downside risks as less acute.
The policy decision
Governing Council members agreed that they had seen further recent progress in core inflation and in key indicators of underlying inflation. While there were different views on how much more assurance was needed to be confident that inflation was on a sustainable path back to the 2% target, there was consensus to maintain the policy rate at 5%.
In its communications on the previous two interest rate decisions, Governing Council had stressed it was looking for “further and sustained easing in core inflation.” Members agreed that the decline in core inflation in January and February was “further” easing, and they wanted to see this easing “sustained.”
While there was a diversity of views about when conditions would likely warrant cutting the policy rate, they agreed that monetary policy easing would probably be gradual, given risks to the outlook and the slow path for returning inflation to target.
Governing Council agreed to continue to closely watch the evolution of core inflation and remain focused on four key indicators of underlying inflationary pressures, namely:
- the balance of supply and demand in the economy
- corporate pricing behaviour
- inflation expectations
- wage growth relative to productivity
Finally, Governing Council agreed to continue its policy of normalizing the balance sheet by allowing maturing bonds to roll off.