On August 7, 2024, the Bank of Canada’s Governing Council released its Summary of Deliberations leading to its monetary policy decision on July 24, 2024.
International Economy
Members discussed global growth prospects. The forecast remained similar to the April Monetary Policy Report, expecting around 3% growth and a gradual easing of inflation in major economies. In the US, recent data indicated an economic slowdown due to reduced consumer spending and a cooling labour market, although there were risks of a rebound. US inflation showed signs of decreasing, with some persistence in service price growth.
In Europe, growth had improved after a weak 2023, boosted by tourism. However, high labour costs were contributing to services price inflation. In China, the domestic economy remained weak, despite strong exports, which faced uncertainty due to trade restrictions and tariffs.
Financial conditions had eased since April, with short-term bond yields declining as markets anticipated monetary policy easing in the US. Corporate credit spreads were narrow, debt issuance was robust, and equity markets were strong, particularly in the tech sector.
Canadian Economy
The Council then focused on the Canadian economy. After a weak second half of 2023, GDP growth resumed in early 2024. Recent data suggested moderate growth driven by population increases, though GDP per person appeared to contract, indicating excess supply in the economy.
Population growth was expected to slow, moderating potential output growth in late 2024. GDP growth was forecast to rise, supported by exports and household spending, despite uncertainties around population growth. Non-permanent resident inflows had increased significantly, contributing to the economic outlook’s uncertainty.
In terms of consumption, rapid population growth supported spending on necessities, while per-person spending on discretionary items remained weak. Business surveys indicated weak future consumer demand, and consumers remained cautious about spending and employment prospects. Consumer spending was expected to strengthen in 2025 as population growth slowed, with some variability depending on mortgage rate changes and income gains from interest-bearing savings.
The housing market showed slower resale activity and weak new home construction due to high costs. Residential investment was projected to rise significantly over 2025, but demand-supply imbalances were likely to persist, especially in urban rental markets where newcomers settled.
Labour market dynamics were discussed extensively. The unemployment rate rose to 6.4% in June, with indicators showing increased labour market slack. Prime-age workers saw limited impact, but new entrants, such as young workers and newcomers, faced challenges. Job vacancies and the job-finding rate declined, and consumer expectations about job prospects worsened.
Wage growth remained volatile, with public sector wages rising and private sector wages easing. Wage growth was expected to moderate due to labour market slack and weak productivity.
GDP growth was expected to pick up in the latter half of the year, driven by residential investment, consumption, and exports. Residential and business investments were forecasted to expand, partly due to easier financial conditions, with government spending contributing to growth. Excess supply was anticipated to be gradually absorbed as GDP growth increased and population growth slowed.
Inflation Outlook
Consumer Price Index (CPI) inflation had remained within the 1% to 3% range since January, easing to 2.7% in June. Core inflation measures had also eased and remained within the target range. Inflation had become less broad-based across goods and services.
Shelter prices were the largest contributor to inflation, driven by strong housing demand and limited supply. Mortgage interest costs had slightly eased, while rent inflation rose close to 9% in June. Inflation in services excluding shelter also increased due to smaller declines in telecommunications prices and elevated prices in labour-cost-linked services.
Members expected core inflation to ease gradually to about 2.5% in the latter half of the year and further in 2025. Total CPI inflation was projected to fall below core in the second half of this year due to base-year effects and then edge up in early 2025, aiming for the 2% target by late 2025.
Monetary Policy Considerations
Council members discussed risks to growth and inflation and their implications for monetary policy. Both total and core inflation had eased gradually toward the target since late 2023, with restrictive monetary policy relieving price pressures.
Members considered various inflation risks, giving more weight to downside risks than in previous meetings. With the economy growing slower than population growth, excess supply had built up, and demand was weak overall. Indicators showed increased labour market slack.
Consumer sentiment was weak, and future spending was uncertain, particularly for households facing higher mortgage rates. While consumer spending per person was expected to recover as borrowing rates declined, debt-servicing costs remained a concern.
Uncertainty about the amount of excess supply and how quickly it might be absorbed was considered, along with services price inflation, particularly in shelter services. Declining mortgage rates or higher-than-expected population growth could increase housing demand, while delays in building more homes could limit supply growth.
Wage growth, well above productivity growth, posed risks of persistent price pressures in services. Some members emphasized the potential for firms to pass on higher input costs to consumers, while others believed firms might absorb costs due to weak demand and maintain stable prices.
Policy Decision
Members agreed that inflationary pressures in shelter and other services might keep CPI inflation above target for longer but felt confident about achieving price stability. They emphasized the need for economic growth to sustainably reach the inflation target and agreed to reduce the policy rate by 25 basis points to 4.5%.
The Council also agreed to continue normalizing the balance sheet by allowing maturing bonds to roll off.
The complete Summary of Deliberations is available on the BOC’s website.
