On March 20th, the Bank of Canada’s Governing Council released its summary of deliberations, leading to its monetary policy decision on March 6, 2024. This summary indicates the reasoning behind the decision to maintain the policy rate at 5%. The council reviewed the international economy, particularly focusing on the United States, Eurozone, and China, and analyzed the implications for the Canadian economy, as well as inflation, labour markets, and housing.
The decision was based on various factors. Below is a simplified, condensed overview; see the Bank of Canada Summary of Deliberations for full details and a more comprehensive explanation of the reasonings behind the decision.
International Economy
The Governing Council began by discussing recent global economic data from the January Monetary Policy Report. Most regions experienced a slowdown in growth, but the United States showed resilience with a slower yet robust economic activity, driven by strong consumer spending and government support. However, the euro area faced challenges with barely positive growth due to soft consumer sentiment and tight monetary policies. China also saw expected growth slowdown, especially in investment, notably in the property sector. Inflation eased in both the United States and the euro area, attributed to improved supply conditions and decreasing core inflation.
Canadian Economy and Inflation Outlook
Council members reviewed Canadian economic data, noting higher-than-projected GDP growth driven by exports but still below potential. Domestic demand declined with modest consumption growth and reduced business investment. Despite some bounce-back in growth in January, concerns persisted about the first quarter’s growth outlook. Export growth partly resulted from continued US demand and methodological changes in data reporting. Employment growth slowed, showing signs of easing wage pressures. Housing market dynamics remained a concern, potentially contributing to inflationary pressures. Inflation indicators suggested slow progress towards target levels.
Considerations for Monetary Policy
Council members emphasized the importance of sustained progress in underlying inflation. Monetary policy seemed to be working as expected in balancing supply and demand, with higher interest rates slowing economic growth. Elevated wage growth compared to productivity raised concerns about inflationary pressures, although signs of wage growth moderation were noted. There were no updates on corporate pricing behavior or inflation expectations, but these indicators were considered crucial for future decisions. Risks to economic growth and inflation, including the persistence of inflation, impact of monetary policy on consumer spending, and global energy and transportation costs, were discussed. The possibility of premature rate changes versus waiting too long to adjust rates was weighed.
In light of these multifaceted deliberations, the Governing Council opted to maintain the policy rate at 5%, acknowledging the need for additional time to restore price stability while judiciously weighing the risks associated with premature rate adjustments.
The Bank of Canada’s decision to maintain the policy rate appears to reflect a cautious approach aimed at restoring stability amidst evolving global and domestic economic conditions.
