The Bank of Canada (BOC) released the summary of the discussions the Governing Council had on the country’s economic situation before making its decision to lower the policy rate on September 4, 2024.
International Economy
Global economic conditions were reviewed. In the U.S., economic growth was stronger than expected, driven by consumer spending. Despite a cooling labour market, household consumption remained surprisingly high, possibly due to low mortgage rates and strong stock market performance, though the lower savings rate raised concerns for future spending. Inflation in the U.S. continued to decrease.
In China, the economic outlook was less positive, with domestic demand weakening further. The country’s export growth appeared unsustainable, and overproduction of goods like steel threatened to drive prices down. Overall, China’s economy showed signs of a long-term slowdown, which could impact global markets.
Global financial conditions had eased, and bond yields were down as markets anticipated rate cuts from the U.S. Federal Reserve. The Canadian dollar strengthened slightly as the U.S. dollar weakened, and oil prices fell compared to earlier forecasts.
Canadian Economy and Inflation Outlook
In Canada, the economy grew by 2.1% in the second quarter, surpassing expectations. This growth came from increased government spending and temporary boosts in business investment, particularly in the aircraft and transportation sectors. However, per capita GDP had declined for five consecutive quarters, signalling some underlying economic weakness.
Household spending slowed more than anticipated, with overall consumption growing by just 0.6% and per capita consumption falling by 2.4%. Residential investment also dropped, particularly in renovations and new construction. The Governing Council speculated that households might be holding off on major purchases due to higher interest rates and were instead saving for future mortgage payments.
The labour market had also weakened, with unemployment rising, especially among youth and newcomers to Canada. Wages were still growing faster than productivity, though this was expected to ease as the labour market cooled.
Inflation, as measured by the Consumer Price Index (CPI), decreased to 2.5% in July, aligning with the Bank’s forecasts. Core inflation measures also eased, with CPI-trim and CPI-median showing declines. The inflationary pressure from shelter costs began to lessen, as mortgage interest rates and rent increases slowed. While some services, like personal care and restaurants, still experienced elevated inflation, the overall trend pointed to easing inflationary pressures.
Risks to Inflation and Economic Growth
The Governing Council discussed the factors affecting inflation. On the one hand, shelter price inflation was slowing, and the housing market had not rebounded as quickly as expected. However, there was still a possibility that the housing market could recover faster, which would drive up house prices and inflation in that sector. Wage growth also posed a risk of feeding into inflation for services.
On the other hand, excess supply in the economy—seen through weak household spending and residential investment—was putting downward pressure on inflation. The labour market slowdown added to this, and there were concerns that businesses might reduce hiring if demand remained soft, which could further dampen economic activity and inflation.
Monetary Policy Considerations
The council weighed these risks and discussed potential scenarios. If economic activity rebounded in late 2024 and into 2025, particularly in the housing market, inflation could rise again. In such a case, it might be necessary to slow the pace of interest rate cuts to avoid overheating the economy. However, if the economy and labour market continue to weaken, the Bank might need to reduce interest rates more quickly to stimulate growth.
The council agreed that their main goal was to ensure inflation moved toward the 2% target. While inflation was easing, they also recognized the need to guard against potential economic weakness that could drive inflation too low.
Policy Decision
Given the broad decline in inflationary pressures, the Governing Council decided to lower the policy interest rate by 25 basis points, bringing it to 4.25%. They also discussed the likelihood of further rate cuts, should inflation continue to ease. However, they emphasized that future rate decisions would be made on a meeting-by-meeting basis, depending on incoming data.
The council agreed to continue normalizing the Bank’s balance sheet by allowing maturing bonds to roll off, further tightening monetary policy in the background.