This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on October 23, 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 October 15, 2024. 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.
International economy
Governing Council members began their deliberations by discussing how the global economy had evolved since the July Monetary Policy Report. Their discussion focused primarily on the outlook for growth and inflation in the United States and China.
In the United States, growth continued to exceed expectations, due mainly to strength in consumption, while inflation eased gradually. Upward revisions to US data on income and savings suggested consumers had more room to spend than the Bank had previously estimated. Members discussed possible explanations for how inflation had declined despite the ongoing strength of economic activity and employment. They considered the possibility that core measures of US inflation may take longer to return to normal than previously expected which, combined with a strong labour market, could slow the pace of further interest rate cuts in the United States.
In China, stimulus measures by national authorities appeared to have prevented further economic weakness, but the effectiveness of the measures to strengthen future growth was not clear. Members also discussed what ongoing softness in the Chinese economy could mean for global commodity prices, which in turn could affect the Canadian economy.
Members also noted continued softness in some larger euro area economies, with weakness in exports and manufacturing offsetting strength in services, mainly tourism. Inflation in the euro area had fallen below 2% but is expected to firm up.
Global financial conditions had eased since the July Report. Shorter-maturity benchmark bond yields had declined amid expectations of easier monetary policy. Credit spreads had also narrowed, reflecting improved economic prospects, and when combined with falling government bond yields made it less expensive for companies to borrow. Equity prices in most major countries had risen, lowering the cost of capital and helping support demand.
Oil prices had been volatile and were about $10 per barrel lower than assumed in July.
Canadian economy and inflation outlook
Discussions then turned to economic activity and inflation in Canada. While GDP growth averaged about 2% in the first half of this year, recent data pointed to slightly slower growth in the second half.
Members discussed conditions in the labour market and concluded that it remained soft. The unemployment rate was 6.5% in September, up from 5.7% at the beginning of the year, while the participation rate declined over the same period. The softness has been seen more through reduced hiring than layoffs, which has led to a decline in the job finding rate. Members noted that this impact has particularly affected young people and newcomers to Canada. Wage growth was also discussed, and it remains elevated on an inflation-adjusted basis when compared with productivity.
Governing Council members also talked about the prospects for population growth. Announcements by the federal government in recent months to further restrict the inflow of non-permanent residents were seen as broadly consistent with the assumptions made at the time of the July Report. These assumptions included a sharp slowing in population growth next year. Members discussed how the timing of the slowing of population growth could impact the outlook for economic growth. They acknowledged that population growth could be above or below the assumed path and that further immigration announcements were possible, adding to the uncertainty about future population growth. They judged that while the forecast for GDP growth would be affected by the path for population growth, the impact on inflation would not be as large, given that population changes affect both demand and supply.
Discussions turned to the outlook for consumption, which had declined on a per capita basis in the second quarter. Members discussed some of the possible factors behind this decline:
- Many fixed-rate mortgage holders who had recently renewed did so at higher interest rates, which has reduced the income available for non-mortgage spending.
- Elevated interest rates provided an incentive to increase savings.
These factors can be expected to decline in importance. While some mortgage holders will be facing higher interest rates when they renew five-year fixed-rate loans, many people have already adjusted their consumption in the face of higher rates. Further, lower interest rates should encourage spending on interest-rate-sensitive goods and services.
Members also considered how the slowing rate of population growth would act as a brake on total consumption growth. They noted that it would take time for lower interest rates to have a big enough impact on per capita spending to overcome the drag on total consumption growth from lower population growth. As a result, they thought that consumption growth could slow in the near term even though reductions in interest rates would ultimately support stronger growth in consumption. They also recognized that given uncertainties about both population growth and how quickly lower interest rates would lead to stronger spending, the timing of the pickup in total consumption was particularly hard to predict.
Members discussed the outlook for business investment. Growth in investment has slowed, with data from the Bank’s Business Outlook Survey and Business Leaders’ Pulse showing subdued business conditions with only a slow increase in demand expected. Some members reported hearing similar sentiments from business leaders during recent outreach trips. With the soft outlook for demand, domestically oriented companies are reporting only modest investment plans, with some waiting for lower financing costs before proceeding. Firms were more optimistic about the prospects for export sales.
Exports contributed to growth despite recent weakness in exports of motor vehicle parts. The Trans Mountain Expansion project has driven a strong increase in energy exports. With the pipeline ramping up close to full capacity over the next few quarters and expected increases in exports of liquefied natural gas, members saw the prospect for stronger energy exports persisting through next year. Strong US demand is also expected to continue to support exports.
Governing Council discussed developments and the outlook for housing. While lower interest rates were expected to stimulate residential investment over the projection horizon, residential investment continued to be soft. Some felt that ongoing muted resales likely reflected, in part, potential homebuyers waiting to see lower mortgage rates before buying. Members discussed the risk that lower interest rates, pent-up demand, and new rules for mortgage qualification could increase demand for housing and boost housing prices more than expected.
Overall, members noted that growth in recent months had been slightly below potential, and considerable economic slack remained.
Regarding inflation, members noted that total consumer price inflation (CPI) had fallen to 1.6% in September—faster than the Bank had projected in the July Report. The decline was largely due to lower global oil prices since July, but it also reflected slightly lower inflation in shelter prices and outright declines in some goods prices. While wage growth had remained elevated, inflation in some CPI components closely linked to wages had been easing. Members also noted that rent pressures were easing in some markets, possibly because of a large supply of new condo units becoming available in certain regions and a decline in the number of international students coming to Canada.
Overall, a range of developments suggested that inflation had returned to around the target following the post-pandemic spike. These included:
- Core inflation measures had declined to below 2½%.
- Price pressures were no longer broad-based, with the share of CPI components growing faster than 3% now slightly below its historical average.
- Inflation expectations of households and businesses had shifted down and were nearing normal.
Governing Council members did note that the distribution of inflation rates among goods and services was unusually wide in September with goods price deflation of -1.0% and services price inflation of 4.0%. The Bank’s forecast called for the distribution to normalize as these downward and upward pressures on inflation ease roughly in tandem, leaving inflation around the 2% target. However, members recognized that in practice, these opposing pressures might not both ease off at the same time, so there could be some ups and downs in inflation. But overall, they expected inflation to remain near the middle of the 1% to 3% range.
Considerations for monetary policy
Members then turned to the implications of these developments for monetary policy. They agreed that with inflation back around target and forecast to remain close to 2%, Governing Council should be equally concerned about inflation coming in either higher or lower than expectations. Members were more confident that sources of upward pressure, particularly shelter costs, would ease. Nonetheless, members still recognized that the housing market could pick up more quickly than expected. Further, wage growth could prove more persistent than anticipated, putting upward pressure on inflation.
At the same time, members noted that excess supply continued to put downward pressure on inflation, growth was looking a little slower through the second half of the year, and the timing of the expected pickup in growth was uncertain. If growth did not rise above potential growth, excess supply could persist in pulling inflation lower.
Members discussed the risks to the outlook, including ongoing elevated geopolitical uncertainty and the risk of impacts from new shocks. They noted that the risks were more prominent than normal.
Policy decision
With multiple indications that low inflation had returned, Governing Council agreed that monetary policy should continue to become less restrictive. Members agreed that the focus should now be on keeping inflation around the 2% target. They decided to cut the policy rate by 50 basis points to 3¾%.
While members considered the merits of cutting the policy rate by 25 basis points, there was strong consensus for taking a larger step. A number of factors were mentioned to support this decision. Members felt increasingly confident that the upside pressures on inflation will continue to decline, so policy did not need to be as restrictive. Further, members felt that a larger step was appropriate given the ongoing softness in the labour market and the need for stronger economic growth to absorb excess supply.
Governing Council also discussed the future path for the policy interest rate. They agreed that if the economy continued to evolve roughly as expected, they anticipated they would be reducing the policy interest rate further. Growth needs to pick up to absorb excess supply in the economy, to keep the labour market from slowing further, and to reduce the downward pressures on inflation as upward pressures ease. Members shared perspectives about how much more the policy rate would need to be reduced. These discussions reflected a number of factors, including the outlook for the economy and the timing over which excess supply would be absorbed; the relative pace by which upside and downside forces on inflation would diminish; and uncertainty about the neutral policy interest rate.
Since a 50-basis-point cut is unusual, some members expressed concern that it might be interpreted as a sign of economic trouble, leading to expectations of further moves of this size or to assumptions that the policy interest rate would need to become very accommodative in the future. Governing Council members wanted to convey that a larger step was appropriate given the economic data seen since July. At the same time, they continued to expect the economy to grow and inflation to remain close to target. They agreed that given the uncertainties around how the drivers of growth and inflation will evolve, they would continue to proceed with decisions one meeting at a time, guided by incoming data.
Finally, Governing Council agreed to continue its policy of normalizing the balance sheet by allowing maturing bonds to roll off.