Monetary Policy Decision Press Conference Opening Statement

Good morning. I’m pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our policy decision.

Today, we lowered the policy interest rate by 25 basis points, bringing it to 2.75%.

The Canadian economy ended 2024 in good shape. Inflation has been close to the 2% target since last summer. Substantial cuts to our policy rate through the second half of last year boosted household spending and economic growth.

However, in recent months, the pervasive uncertainty created by continuously changing US tariff threats has shaken business and consumer confidence. This is restraining household spending intentions and businesses’ plans to hire and invest.

Against this backdrop, and with inflation near the 2% target, Governing Council decided to reduce the policy rate a further 25 basis points.

Looking ahead, the trade conflict with the United States can be expected to weigh on economic activity, while also increasing prices and inflation. Governing Council will proceed carefully with any further changes to our policy rate given the need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand.

Let me expand on these key considerations.

Economic data since our January Monetary Policy Report (MPR) suggests the Canadian economy ended 2024 on a stronger footing than we expected. Past interest rate cuts have boosted consumer spending and business investment, increasing domestic demand in the fourth quarter by a robust 5.6%. Overall, GDP grew 2.6% in the fourth quarter after upwardly revised growth of 2.2% in the third quarter. This growth path is considerably stronger than we were expecting based on the information we had in January.

Job growth also strengthened around the end of the year before stalling in February. Growth in employment increased in November through January, surpassing labour force growth, and the unemployment rate declined to 6.6%. There were also signs that wage growth is moderating.

Inflation has remained close to the 2% target. The temporary GST/HST holiday has lowered some consumer prices, but January inflation came in a little firmer than expected at 1.9%. Inflation is forecast to increase to about 2½% in March with the end of the tax break.

Today, we have published new survey data on what we are hearing from businesses and households. While it is too early to see much impact of new tariffs on economic activity, our surveys suggest that threats of new tariffs and uncertainty about the Canada-US trade relationship are already having a big impact on business and consumer intentions.

Canadians are more worried about their job security and financial health as a result of the trade tensions, and they intend to spend more cautiously. Job security concerns increased particularly among workers in export-oriented industries, including manufacturing, mining, and oil and gas.

Businesses have lowered their sales outlooks, notably in manufacturing and in sectors that depend on discretionary spending by households. Credit has become more difficult to access for some businesses, and with a weaker Canadian dollar, the cost of imported machinery and equipment has risen. As a result of all these trade-related factors, many businesses have scaled back their hiring and investment plans.

Our surveys also suggest business intentions to raise prices have increased as they cope with higher costs related to both uncertainty and tariffs. At the same time, inflation expectations have moved up as Canadians brace for the possibility of higher prices.

The recent shift in consumer and business intentions is expected to translate into a marked slowing in domestic demand in the first quarter of this year. At the same time, merchandise trade data suggest businesses on both sides of the Canadian border have stocked up on imports in advance of tariffs. As a result, Canadian exports and imports are both expected to be stronger in the first quarter. But the impact on exports looks to be bigger, which should provide some offset to weaker domestic demand in the quarter.

Of course, this pull-forward in exports likely means weakness ahead. If household and business spending intentions remain restrained, the combination of weaker exports and soft domestic demand would weigh further on economic activity in the second quarter.   

The impacts of uncertainty and tariffs on inflation are more difficult to assess. Uncertainty that weighs on household and business spending tends to put downward pressure on inflation. And new tariffs will hurt our exports and weaken business investment. But costs are rising too, and this will put upward pressure on inflation. A weaker Canadian dollar and new retaliatory tariffs both make imports more expensive. Businesses are also telling us that uncertainty itself imposes new costs.  

It will take some time for the impacts of higher costs and weaker demand to work their way through the economy and affect the prices Canadians will face. Governing Council will be tracing the impact of cost pressures through to consumer prices. We will also be closely monitoring inflation expectations. Keeping medium- and longer-term inflation expectations well anchored is imperative to ensure any rise in inflation is temporary.

Let me wrap up.

We ended 2024 on a solid economic footing. But we’re now facing a new crisis. Depending on the extent and duration of new US tariffs, the economic impact could be severe. The uncertainty alone is already causing harm.

Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation. The focus of Governing Council will be on assessing the timing and strength of both the downward pressure on inflation from a weaker economy and the upward pressure from higher costs.

As always, the Bank will be guided by our monetary policy framework and our commitment to maintain price stability over time.

With that, the Senior Deputy Governor and I would be pleased to take your questions.