Good morning. Senior Deputy Governor Carolyn Rogers and I are here to discuss our policy decision and the Monetary Policy Report (MPR).
Today, we lowered the policy interest rate by 25 basis points, marking our sixth consecutive decrease. This adjustment brings our policy rate to 3%. Additionally, we announced plans to complete the normalization of our balance sheet by ending quantitative tightening. The Bank will restart asset purchases in early March, with a gradual approach intended to stabilize and modestly grow the balance sheet in line with economic growth.
We have three main messages this morning.
First, inflation has been close to the 2% target since last summer. "Monetary policy has worked to restore price stability."
Second, lower interest rates are boosting household spending, and economic activity is picking up.
Third, there is potential for a trade conflict triggered by new US tariffs on Canadian exports. This presents a major uncertainty that could disrupt the Canadian economy and cloud its outlook.
Given that predicting the scope and duration of a possible trade conflict is challenging, today's MPR projection provides a baseline forecast without tariffs while also discussing potential consequences of such a conflict.
Let me expand on the first two messages before addressing tariff threats.
Regarding inflation: A year ago, inflation was at 3%, with short-term expectations elevated and broader-than-normal inflationary pressures. Recently, inflation has remained near 2%, with normalized business and consumer expectations. There is no longer evidence of broad-based inflationary pressures. While shelter price inflation remains high, it is gradually decreasing.
Despite anticipated volatility in CPI inflation due to temporary tax measures, we forecast that inflation will remain near the 2% target over the next two years.
On growth: Economic activity shows signs of gaining momentum as past interest rate cuts influence the economy. Lower borrowing costs are boosting housing market activity and consumer spending on big-ticket items like automobiles. Household spending is broadening to other consumer items and is expected to strengthen further. Although business investment has been weak, it is forecasted to increase gradually. New export capacity for oil and gas supports export outlooks.
Employment has strengthened recently; however, job creation lags behind labor force growth for over a year, leaving the labor market soft. In December, unemployment stood at 6.7%, with wage pressures showing signs of easing despite being sticky.
The Bank forecasts GDP growth will rise from 1.3% in 2024 to 1.8% in both 2025 and 2026. Growth in GDP per person is projected to increase as lower interest rates and rising incomes support spending—though more modestly than October's projections due largely to new federal immigration policies impacting population growth.
Risks surround our outlook; Governing Council expresses equal concern about inflation exceeding or falling below the 2% target absent tariff threats—the risks are roughly balanced regarding this outlook's implications for tariffs: US trade policy poses significant uncertainty amid numerous scenarios unknowns such as imposed tariff timing/duration/scope/retaliatory measures/fiscal supports which all complicate economic impact predictions given limited experience dealing with proposed magnitude tariffs yet some aspects remain clear:
A prolonged/broad-based trade conflict would severely impact Canadian economic activity alongside direct upward pressure exerted upon import good prices' effect upon domestic price levels—the timing/magnitude thereof dependent significantly upon American/Canadian businesses' adaptation strategies vis-a-vis increased import costs—with tariffs inevitably resulting reduced efficiency/productivity across affected economies monetary policies cannot offset entirely though capable aiding adjustments instead—inflation nearing targeted levels allows enhanced role supporting stability under present conditions albeit constrained singularly through policymaking instruments limiting simultaneous counteraction weaker output versus heightened price level tensions necessitating careful assessment downward pressure associated weaker economies weighed against opposing influences deriving higher input prices/disruptions along supply chains requiring consideration:
In recent years we've invested resources improving supply chain/trade linkage knowledge fostering inter-sectoral connectivity analyses facilitating assessments supply disruption effects—including those stemming specifically from tariff impositions—while commencing evaluations concerning various scenario impacts illustrating examples within current MPR issue; concurrently expanding outreach efforts nationwide soliciting firsthand accounts individuals/businesses grappling uncertainty augmenting surveys better comprehend decision-making responses coping mechanisms eventuating conflicts while providing updates analysis assessments forthcoming developments occur enabling informed public discourse amidst evolving situations having restored low-inflation environments coupled substantially reduced interest rate settings monetary policies ideally positioned assist adjusting emerging dynamics guided unwavering adherence established frameworks commitment maintaining enduring price stability 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