This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on June 5, 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 May 31. 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 reviewing recent data on the global economy since the April Monetary Policy Report. Global growth improved modestly to about 3% in the first quarter of the year, broadly in line with expectations. US growth slowed, while growth in the euro area and China picked up.
The US economy was weaker than expected, largely due to drag from exports and inventories. Consumption growth and business investment were both solid but had slowed. US inflation had proven sticky in recent months, but Governing Council members continued to expect that it would gradually ease.
In contrast, growth in China increased after unevenness in 2023, and growth in the euro area resumed after stalling in the second half of 2023. The pickup in China’s economy was mostly due to foreign demand boosting exports, while domestic demand remained subdued. Economic activity increased modestly in the euro area driven mainly by an increase in demand for services.
Members noted that while headline inflation was below 3% in both the United States and euro area, three-month measures of core inflation had picked up in both regions relative to the beginning of the year, reversing earlier downward momentum. Although inflation was expected to continue to ease gradually, progress toward central bank targets could be bumpy.
Oil prices had initially risen above levels assumed in the April Report because of global concerns of major oil disruptions, but these concerns subsequently subsided. Overall, oil prices averaged close to those assumed in April. Financial conditions were seen as largely unchanged since the April Report.
The Canadian economy and inflation outlook
Governing Council members discussed recent developments in the Canadian economy. The national accounts data showed economic growth resumed in the first quarter of 2024 after stalling in the second half of 2023. At 1.7%, growth was slower than forecast in the April Report. But with final domestic demand up by 2.9%, domestic spending was solid. Consumption grew by about 3%, which was roughly in line with population growth. Purchases of motor vehicles and several categories of services contributed to the rise in consumption growth.
Business investment grew more than expected in the April Report and contributed positively to growth, as did residential investment and exports. Weaker investment in inventories was the main factor that held back economic activity in the quarter. Members discussed whether the strength in consumption led to inventories being drawn down or if companies were not replenishing stocks due to a lack of confidence in future sales.
Members noted that the savings rate was higher than expected, with stronger growth in income. Higher savings could be an indication of greater cautiousness among consumers as they wait for economic conditions to improve. It could also reflect reduced spending for those households anticipating higher debt repayments when they renew their mortgage.
Members discussed recent data on the labour market and agreed that it was evolving largely as expected at the time of the April Report. A broad range of indicators showed that labour market pressures had eased. Businesses continued to hire, but job creation has been slower than growth in the working-age population.
Annual wage growth remained at around 4%, but with volatility among the different measures. This level of wage growth, combined with weak productivity growth, means that unit labour costs continue to increase at an above-average pace. Members acknowledged that wage growth needed to be considered in the context of firms’ other costs as well as their profit margins to determine its likely impact on inflation.
Members spent considerable time discussing recent inflation data. Consumer price index (CPI) inflation edged down in April to 2.7%. The Bank’s preferred measures of core inflation also eased in April and were growing at around the same rate as headline inflation. Further easing was considered likely given that three- and six-month measures of core inflation had been running lower than year-over-year rates.
Governing Council also reviewed the breadth of price increases across CPI components. The share of components growing above 3% on an annual basis had continued to decline and was close to its historical average in April. However, shelter inflation was still high and remained the largest contributor to total CPI inflation.
Members agreed that restrictive monetary policy had worked to restrain activity and slow the rate of inflation.
Considerations for monetary policy
Governing Council members continued their discussion from their April meeting about how much assurance they needed to be confident that inflation was sustainably on track to reach the 2% target. They also discussed whether the conditions were now in place to start dialling back the restrictive stance of monetary policy.
Members agreed that the recent evolution of core inflation—with both preferred measures below 3% after easing for four straight months—had increased their confidence that progress toward the 2% target would continue.
They discussed recent developments on the four indicators of future inflation they had been monitoring. New data on inflation expectations and corporate pricing behaviour were not available, but these indicators had been evolving constructively at the time of the April Report. The discussion focused primarily on the balance between supply and demand. Members’ assessment of first-quarter GDP data was that the economy was still in excess supply, suggesting there was room for the economy to grow even as inflation continued to recede. Members agreed that while wage growth remained somewhat elevated compared to historical experience, it should continue to ease gradually as upward pressure from past labour market tightness and high inflation subsided.
Members spent considerable time discussing the risks around the future path for inflation. They discussed several risks to the outlook for economic growth and inflation, namely:
- The large number of households renewing mortgages at higher rates and with higher payments in 2025 could curb spending and dampen economic activity and inflation more than expected. Alternatively, consumption could rebound more than expected as consumer confidence recovers.
- Persistently strong wage growth and weak productivity growth could lead to inflationary pressures in services prices. Members acknowledged that upward pressure in services prices is so far being offset by more disinflation in goods prices.
- Cuts to interest rates could lead to an overheated housing market, given pent-up demand.
- The timing and impact of government plans to unwind the rapid growth in non-permanent residents could affect the forecast for inflation and growth. Since newcomers affect both demand and supply in the economy, members agreed that these plans would typically not have a large effect on the inflation forecast. But strong population growth could put upward pressure on shelter inflation, particularly rents. Economic growth would likely be more sensitive to population growth. They felt they would need to watch population dynamics carefully in the coming months.
- Geopolitical tensions or the worsening of regional conflicts abroad, and labour disruptions or climate events such as wildfires in Canada, could affect global oil prices, supply chains and inflation.
In discussing these risks, members placed different weights and likelihoods on each. Some members were more focused on the downside risks to inflation stemming from a weak economy and the continued effects of restrictive monetary policy. Others put more weight on the upside risks associated with persistence in wage growth and the potential for a housing market rebound.
Finally, members discussed the potential for a divergence between monetary policy in Canada and the United States. A key feature of Canada’s monetary policy framework is a flexible exchange rate, which allows the Bank to set monetary policy geared to the needs of the Canadian economy. Members discussed many potential drivers that could affect the exchange rate, including market expectations for monetary policy divergence. While members agreed there are likely limits to how far monetary policy in Canada can diverge from US policy, the limits were not close to being reached.
The policy decision
Governing Council discussed how the accumulated evidence improved their confidence that progress toward the 2% target would be sustained. Members agreed that with further evidence showing that underlying inflation is easing and on a more sustained trajectory toward 2%, monetary policy no longer needed to be as restrictive and a reduction in the policy rate was appropriate.
Given the risks to the inflation outlook, members considered the merits of waiting for additional monthly CPI data to gain further assurance before reducing the policy rate in July. While they recognized the risk that progress could stall—as it had in the United States—there was consensus that with four consecutive months of easing in core inflation and indicators suggesting continued downward momentum, there had been sufficient progress to warrant a first cut in the policy rate. Thus, Governing Council decided to reduce the policy rate by 25 basis points to 4.75% at this meeting.
They also agreed that if inflation continued to ease and remained on a sustainable track to the 2% target, it was reasonable to expect further cuts to the policy interest rate. Members also agreed that monetary policy easing would likely be gradual given that inflation is forecast to ease toward the target gradually. The timing of any further reductions in the policy rate would depend on incoming data and its implications for the future path of inflation. They therefore agreed to emphasize in their communications that they would take future monetary policy decisions one meeting at a time.
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 growth
Finally, Governing Council agreed to continue its policy of normalizing the balance sheet by allowing maturing bonds to roll off.