The Bank of Canada has released a summary of the deliberations by its Governing Council that led to the monetary policy decision on September 4, 2024. This account provides insight into the discussions held during stage three of the Bank's monetary policy decision-making process, which occurs after members have received all staff briefings and recommendations.
The policy decision-making meetings began on August 29, 2024, presided over by Governor Tiff Macklem. Attendees included Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Sharon Kozicki, Nicolas Vincent, and Rhys Mendes.
**International Economy**
The Governing Council started their deliberations with an analysis of global economic developments since the July Monetary Policy Report. They focused primarily on growth and inflation in the United States and China.
In the United States, growth exceeded expectations in July due to strong consumption. Despite a slowing labor market, household spending remained robust, possibly supported by strong equity markets and low mortgage rates for existing holders. However, a low saving rate was noted as a potential future weakness indicator. Inflation in the United States continued to ease.
China faced increased downside risks to its growth outlook due to weak domestic demand and unsustainable export growth. Members discussed whether China might be experiencing a secular slowdown in economic activity, with overproduction in sectors like steel potentially leading to price declines.
Global financial conditions had eased further since July. Bond yields declined as expectations solidified that the US Federal Reserve would soon cut rates. The Canadian dollar appreciated modestly due to a weaker US dollar, while oil prices were lower than assumed in July.
**Canadian Economy and Inflation Outlook**
Council members then reviewed recent data on Canada's economic activity and inflation. The economy grew by 2.1% in Q2 2024, stronger than anticipated mainly due to increased government spending and temporary volatility in business investment related to aircraft and transportation equipment categories. However, GDP per capita fell for the fifth consecutive quarter.
Household spending was weaker than expected in Q2 2024 with overall consumption growth slowing to 0.6%. Residential investment also decreased significantly due to declines in renovations and new construction projects. The high household savings rate suggested consumers might be waiting for lower interest rates or preparing for higher mortgage payments at renewal.
Labor market dynamics showed continued weakening since July with labor force growth outpacing employment growth. Although layoffs remained muted, unemployment rose among newcomers to Canada and youth who faced more difficulty finding jobs. Wage growth stayed elevated compared to productivity growth but was expected to ease given labor market slack.
Consumer price index (CPI) inflation eased further in July to 2.5%, aligning with the Bank’s forecast. Core inflation measures such as CPI-trim (2.7%) and CPI-median (2.4%) also decreased while inflationary pressures waned overall except for shelter price inflation which showed early signs of easing.
Members agreed that both economy and inflation evolved largely as anticipated since July but noted some downside risks if GDP growth remains soft beyond mid-year indicators suggesting slowdowns in June and July.
**Considerations for Monetary Policy**
Governing Council discussed risks affecting inflation outlooks including opposing forces exerting upward/downward pressure on inflation:
- Shelter price inflation remained high but showed signs of slowing.
- Housing market rebound had not materialized yet; affordability constraints persisted.
- Service prices excluding shelter saw slight easing indicating reduced persistent risk.
- Wage growth outpaced productivity raising concerns about service price inflations from labor costs.
- Excess supply continued putting downward pressure: weak household spending/residential investments; softening labor market could delay economic rebound thus weakening inflation more than expected.
Members debated balanced risks where strength offset downward pressures versus concerns over potential economic/labor market weakening affecting inflation goals requiring above-potential output rates ensuring target proximity without excessive falls below targets:
Possible scenarios discussed:
1) Lower interest rates spur faster-than-expected economic recovery boosting housing/inflation necessitating slower rate cuts.
2) Continued/greater-than-anticipated weaknesses warranting quicker rate reductions maintaining progress towards targeted inflations while guarding against downside risks stemming from economic activity weaknesses.
**Policy Decision**
The Governing Council decided it appropriate reducing policy rate another 25 basis points bringing it down at 4¼%. They acknowledged future paths depending upon incoming data guiding decisions one meeting at time amidst countervailing forces influencing inflations committing normalizing balance sheet policies allowing maturing bonds roll-offs.