Good morning. I’m pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss the July Monetary Policy Report (MPR) and today’s policy announcement.
Today, we lowered our policy interest rate a further 25 basis points to 4.5%.
This decision reflects three key considerations.
First, monetary policy is working to ease broad price pressures.
Second, with the economy in excess supply and slack in the labour market, the economy has more room to grow without creating inflationary pressures.
Third, as inflation gets closer to the 2% target, the risk that inflation comes in higher than expected has to be increasingly balanced against the risk that the economy and inflation could be weaker than expected.
Looking ahead, we expect inflation to moderate further, though progress over the next year will likely be uneven. This forecast reflects the opposing forces affecting inflation. The overall weakness in the economy is pulling inflation down. At the same time, price pressures in shelter and some other services are holding inflation up. We are increasingly confident that the ingredients to bring inflation back to target are in place. But the push-pull of these opposing forces means the decline in inflation will likely be gradual, and there could be setbacks along the way.
If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate. The timing will depend on how we see these opposing forces playing out. In other words, we will be taking our monetary policy decisions one at a time.
Let me highlight some of the economic dynamics covered more fully in the MPR.
Economic growth in Canada has picked up but remains weak relative to population growth. Household spending has been soft. Pent-up demand for things like new cars and travel is fading. And many families are setting aside more of their income for debt payments, leaving less money for discretionary spending.
In the labour market, employment has continued to grow more slowly than the labour force. Job seekers are now taking longer to find work, and unemployment rate has risen to 6.4%. The job vacancy rate has come down significantly, and reports of labor shortages are now below normal. Overall indicators suggest some slack in labor market Wage growth is also showing signs of moderating although it remains elevated
Looking ahead economic growth is expected increase second half 2024 through 2025 This reflects stronger exports recovery household spending borrowing costs ease Business investment also expected strengthen demand picks residential investment forecast grow robustly Overall with economy strengthening excess supply absorbed next year into 2026
CPI Inflation moderated June after increasing May broad pressures continued ease Bank preferred measures core have now been below several months breadth price increases across components near historical average Corporate pricing behavior largely normalized near-term expectations come down although still above However shelter remains high evident services closely affected wages such restaurants personal care
The Bank’s preferred measures of core inflation are expected slow about second half ease CPI forecast come down below this fall settle sustainably around next year unlikely straight line
As always there risks around outlook Globally geopolitical uncertainty high Here biggest downside household weaker On upside shelter other prove persistent
Let me conclude With broad continuing move closer Governing Council decided reduce recent months progress bringing With target sight more downside risks taking increased weight deliberations We need pick so does not fall much even work get carefully assessing downward ongoing excess supply pressures holding guided incoming assessment implications remains resolute commitment restoring stability Canadians
With summary Senior Deputy Governor questions