The Bank of Canada (BOC) announced its Summary of Governing Council deliberations, to provide explanation and background to its April 10th, 2024 rate announcement.
Key housing and shelter-related discussions and information included how the imbalance between housing supply and demand, combined with the slow pace of housing supply expansion, was contributing to short-term pressure on shelter inflation, including rent and other housing-related costs. Shelter price inflation remained the primary driver of CPI inflation. They also considered the risk of accelerated housing market activity further driving up shelter prices, especially with easing monetary policy. Members deliberated on how mortgage interest costs should be addressed in monetary policy, agreeing to focus on core inflation measures like CPI-trim, which exclude these costs but still capture rent prices indicative of housing demand and supply.
Below is a short summary of the deliberations; the full Summary of Governing Council deliberations can be found on the BOC website.
International Factors
The global economy seemed to be poised for stronger growth in 2024 and 2025, with the US contributing significantly. Despite ongoing weakness in the Euro area, a gradual improvement is anticipated. China may face challenges, with subdued consumer confidence and property sector concerns. Most major economies are projected to experience gradual inflation easing, though variations exist. The US was given a notable upward revision in growth projections, fueled by robust consumption driven by tight labour markets and wealth accumulation. There’s a potential for even stronger GDP growth due to sustained income growth and government incentives fostering investment. Equity markets are robust. Corporate credit spreads had narrowed. Also notably, geopolitical tensions are affecting oil prices. International financial conditions appear to be easing, with improved economic prospects and reduced recession risks.
Canadian Economy
After a slowdown in late 2023, growth is expected to rebound in early 2024, driven by robust population growth. Inflation, at 2.8% in February, is projected to be around 3% in H1 2024, aligning with January forecasts. It’s anticipated to dip below 2.5% in H2, hitting the target by 2025. Higher population growth led to a revised and increased potential output for 2024 for surplus supply. Population dynamics complicate economic and inflation outlooks. There is short-term inflation pressure from increased population, particularly on housing-related elements.
Factors that could contribute to a growth rebound in 2024 include the increasing US demand for Canadian exports, provincial spending plans boosting growth from Q2, and a gradual business investment recovery from a weak 2023. The March Labor Force Survey indicated that job gains continued to lag behind population growth, but the job vacancy rate neared pre-pandemic levels. Unemployment was 6.1% above pre-pandemic levels. Wage growth showed signs of easing. While productivity growth improved, it needs to increase significantly for current wage growth to be compatible with the 2% inflation target. Real unit labour costs remained high. Recent inflation data appeared positive, easing for goods, food, energy, and services – but not shelter/housing.
Overall, the Council was confident in a balanced inflation outlook, expecting gradual core inflation easing, despite oil price impacts.
Considerations
In assessing timing considerations, the Governing Council discussed some of the risks to the outlook for growth and inflation.
They deliberated on what their prerequisites were for ensuring inflation’s sustainable path to the 2% target, assessing key indicators of underlying inflation, including demand-supply balance and corporate pricing behavior. They were more confident that inflationary pressures would ease, even as economic growth increased.
Corporate pricing behavior is normalizing, reflected in less frequent price increases according to CPI micro data, consistent with Bank survey findings. Businesses’ inflation expectations align with the Bank’s projections, indicating future inflation trends. Wage growth passed productivity, but this is expected to ease as labour market conditions cool. Favourable progress in key indicators added to confidence in underlying inflation and being able to steer inflation to the 2% target and timing for monetary policy adjustments.
Policy Decision
Recent advancements in core inflation and underlying inflation indicators were acknowledged. Despite differing opinions on what was required for inflation’s sustainable return to the 2% target, the consensus was to maintain the policy rate at 5%.