This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on December 6, 2023.

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 Friday, December 1 and continued on December 4 and 5. 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.

The international economy

Governing Council members began their deliberations by discussing recent global economic developments. Global growth had continued to slow since October, and inflation had eased in most major economies.

While the overall growth profile was consistent with expectations in October, the US economy had been stronger than expected. This was offset by weakness in the rest of the world. Members discussed the continued strength in US consumer spending and the drawdown in accumulated savings. Growth in the euro area weakened as monetary policy contributed to slower spending. In China, growth rebounded due to increased consumer spending, but uncertainty about the property sector and policy response remained high.

As global growth slowed in recent months, inflation eased further. Lower energy prices contributed to a drop in year-over-year inflation in the United States and the euro area. Lower inflation for food and core goods also contributed to the decline in both economies.

Global oil prices had fallen by about $10 per barrel since the October Monetary Policy Report (MPR). The US dollar had weakened against most currencies, including Canada’s. Governing Council noted that financial conditions had eased since the October MPR as growth slowed, inflation waned globally and market expectations for central bank policy shifted. After rising in the weeks before the last decision, long-term US interest rates had fallen much of the way back to where they had been, and Canadian long-term yields had followed a similar path. Meanwhile, equity and corporate credit markets had strengthened.

The Canadian economy and inflation outlook

Governing Council reviewed developments in the Canadian economy and the dynamics of inflation since October. Canada’s economic growth had essentially stalled in the middle quarters of 2023. National Accounts data for the third quarter showed economic growth had contracted at a rate of 1.1%, after expanding at a rate of 1.4% in the second quarter.

The slowdown was largely due to consumption, which had been flat over the second and third quarters. Higher interest rates continued to restrain consumer spending on many goods and services. Business investment had also been flat over the past four quarters, albeit with more volatility.

Government spending and residential construction contributed positively to growth in the third quarter. As a result, final domestic demand grew by 1.3% in each of the last two quarters. Governing Council members noted that part of the third-quarter increase in government spending was in response to wildfires and was therefore expected to be temporary. Housing activity rose by 8.3% in the third quarter, largely because of an increase in new home construction. Members commented that while it was encouraging to see spending on the construction of new houses and apartments, a significant and sustained increase in new home construction would be needed to resolve the long-standing structural shortage in supply.

Members turned to a discussion of the labour market. Data from the most recent Labour Force Survey pointed to continued easing. The slowing economy had brought job vacancies down to close to the pre-pandemic trend. Job growth continued to rise more slowly than the pace implied by population growth, and the unemployment rate picked up slightly in November to 5.8%. However, members noted that wage growth remained elevated, within a 4% to 5% range. Wage growth in the private sector had eased slightly since the start of the year, whereas public sector wage growth had risen.

Initial indicators for the fourth quarter suggested economic growth would remain weak as higher interest rates continued to hold back spending. With a range of indicators suggesting the economy was approaching balance in the third quarter, and with growth expected to be weak in the fourth quarter, members concluded the economy was no longer in excess demand.

Governing Council reviewed recent data on inflation. Consumer price index (CPI) inflation eased to 3.1% in October from 3.8% in September. While the drop largely reflected lower gasoline prices, the evidence was clear that higher interest rates had reduced price pressures on a broadening range of goods and services. The share of CPI components growing above 3% and 5% year-over-year continued to tick down in October. Notably, many durable goods saw price declines in October, while services price inflation excluding shelter was lower than earlier in the year.

Members discussed at length the acceleration of shelter price inflation, which rose at a rate of 6.1% in October and contributed 1.8 percentage points to the total CPI reading of 3.1%. Higher mortgage interest costs were clearly playing a role in shelter price inflation. However, rent and other components linked to house prices (such as insurance, taxes and maintenance), also grew strongly, which is unusual. For example, rent inflation was 8.2% in October, a 40-year high. Governing Council members noted that higher interest rates were restraining demand for housing, but the structural shortage of supply was supporting elevated house prices.

Overall, core measures of inflation had remained in the 3.5% to 4% range but had edged down to the lower end of that range in October. On a three-month annualized basis, core inflation dropped to about 3%.

Considerations for monetary policy

Governing Council members agreed that past increases in the policy interest rate were continuing to feed through the economy, slowing spending and relieving price pressures. With data indicating continued slow growth in the fourth quarter, their outlook for the economy was broadly in line with the October projection. Members anticipated that weakness in consumption and business investment would continue for the next two to three quarters. With the economy no longer in excess demand, members agreed they would be watching for signs that the slowdown in the economy was translating into further and sustained easing in inflation.

At their October meetings, members had expressed concern that, measured on a three-month annualized basis, core inflation had remained stuck in a range of 3.5% to 4% for almost a year with little downward momentum. At their December meetings, members viewed the drop in core measures in the more-recently published October CPI data as a positive sign. However, they agreed that one month of inflation data was not enough to give them confidence that inflation would continue to trend down to 2% in a sustainable way.

Members discussed other indicators they have been watching to assess the path of underlying inflation. Wages continued to grow within a 4% to 5% range. If this were to continue, it would not be consistent with achieving price stability, particularly given weak productivity. No new survey information had been released on either corporate pricing behaviour or the near-term inflation expectations of consumers and businesses. Members said they wanted to see more evidence that these indicators were trending in a direction that is consistent with price stability.

Governing Council members also expressed concern that shelter price inflation could remain elevated and that this could make it more difficult to return inflation to 2%. Some members expressed the view that costs related to house prices would ease as higher interest rates continued to restrain spending and weigh on the housing market. Others were concerned that elevated shelter price inflation could persist or even accelerate given that it will take time for supply to catch up to demand. Members noted that if financial conditions eased prematurely, the housing market could rebound, further fuelling shelter price pressures. They agreed that monetary policy could not solve the structural shortage of supply in the housing market. Members said they would continue to monitor closely the evolution of shelter price inflation and its contribution to core inflation and total CPI inflation.

Overall, Governing Council members concluded that recent data pointed in the right direction. But with considerable uncertainty surrounding the outlook for inflation, they agreed that risks remained elevated. They saw two broad types of risks: the expected decline in inflation could stall with inflation still materially above 2%, or new developments could lead to renewed inflationary pressures. In this context, Governing Council needed to remain vigilant.

The policy decision

Governing Council agreed to maintain the policy rate at 5%. Past monetary policy actions had cooled the economy and continued to relieve price pressures.

As they did at the previous meeting in October, members reflected on whether monetary policy was sufficiently restrictive to restore price stability. They noted that recent data, including in the National Accounts, the Labour Force Survey and the October CPI, indicated that monetary policy was working as expected to slow economic activity and ease inflationary pressures. However, inflation remained too high, and they needed to see a further and sustained decline in core inflation.

Members agreed that the likelihood that monetary policy was sufficiently restrictive to achieve the inflation target had increased. But they also agreed that risks to the inflation outlook remained, and it may still be necessary to increase the policy rate to secure further disinflation and restore price stability.

Governing Council members therefore decided to reiterate that they were prepared to raise the policy rate further if needed.

To assess the evolution of underlying inflationary pressures, they agreed to remain focused on the balance of supply and demand in the economy, wage growth, corporate pricing behaviour and inflation expectations. Members emphasized that these indicators were not intermediate targets but that they provided helpful information on where inflation is headed.

Finally, Governing Council agreed to continue its policy of normalizing the balance sheet by allowing maturing bonds to roll off.