This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on January 24, 2024.

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 January 16. 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 slowed, but not by as much as projected in the October Monetary Policy Report , mainly because of stronger-than-expected growth in the United States. Inflation had eased further across most economies.

Consumer spending in the United States had been surprisingly resilient. However, members said they expect spending to slow in the coming quarters as consumers adjust to higher interest rates, having already spent a good deal of their pandemic-related savings. Nevertheless, members agreed there was a risk that US consumer spending could continue to be stronger than expected.

Euro area growth remained weak, and members expected a mild contraction in the area before growth picks up gradually over the next two years. Factors contributing to this slowdown include past interest rate increases, weak demand for Euro area exports and higher energy costs. In China, economic activity was expected to remain subdued, reflecting economic policy uncertainty, low consumer confidence and ongoing issues in the property sector.

Inflation in most major economies was expected to continue to ease, reaching central bank targets in 2025. Members discussed the risk that the conflict in the Middle East could broaden, including the risk of an escalation in the attacks on shipping vessels in the Red Sea. This could lead to more material disruptions in supply chains or an increase in oil prices, which could add to inflationary pressures.

Global oil prices had fallen by about $10 per barrel since the October Report due to stronger-than-expected supply and weaker-than-expected global demand for oil. Financial conditions had also eased since October. Bond yields had come down from their highs observed in October and were around where they had been in the summer of 2023. These declines reflected a lower term premium that was due to less uncertainty around growth and the persistence of elevated inflation, as well as market expectations that central bank policy interest rates had peaked.

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 stalled since the middle of 2023. Past interest rate increases had continued to weigh on demand. Growth in consumer spending had slowed, and businesses had curtailed their investment and hiring plans. A range of indicators suggested the economy was in modest excess supply.

As members discussed the outlook for growth, they agreed that more evidence showed that past interest rate increases were working to slow demand in the economy. Households were clearly responding to elevated inflation and higher interest rates by limiting spending. Consumer confidence had been weak. Over the past four quarters, per capita consumption growth had been negative. Members expected continued weakness in consumption in the coming months. Additional households will be renewing mortgages in 2024 at a higher interest rate, which will lower the amount of disposable income they have to spend on other goods and services. Renters were also struggling with rising costs and were curtailing their spending. While still below prepandemic levels overall, measures of financial stress had continued to edge up in recent months, particularly delinquency rates for nonmortgage debt. Household spending was expected to pick up later in the year and into 2025 as the effects of past interest rate increases wane and financial conditions ease.

Other parts of the economy were also subdued. Residential activity was expected to pick up in early 2024, following a year in which residential construction had contracted, and housing resale activity had remained weak. Business investment and exports were expected to remain soft in the first half of 2024 before picking up in the second half of the year.

Governing Council spent some time discussing labour market conditions. Job vacancies had returned to close to their prepandemic levels, and the pace of new job creation had slowed to a rate below that of working-age population growth. Some sectors still faced shortages of skilled labour, but, overall, the labour market was better balanced. Nevertheless, wage growth around 4% to 5% continued to be broad based. Members viewed past wage growth as largely reflecting catch-up with the cost of living, and that wage growth was not a problem for inflation if coupled with productivity growth. However, they expressed concern that unless productivity growth was exceptionally strong, wage growth in this range could hold inflation up. Given reports that labour shortages were around normal levels and that the economy had more supply than demand, members expected wage growth to moderate gradually. Businesses may retain workers for longer due to past hiring challenges. However, members acknowledged that with job vacancies now lower, future labour market adjustments could come more through increases in unemployment and less through lower vacancies.

Governing Council reviewed recent data on inflation. They agreed that while the slowdown in the economy had contributed to relieving price pressures, progress toward price stability was slow. Consumer price index (CPI) inflation ended the year at 3.4%, while core measures of inflation persisted in the range of 3.5% to 4%. Members spent considerable time discussing several sub-components of CPI and indicators of underlying inflation. Prices for just over half of CPI components were growing at a rate above 3%, indicating that the drivers of too-high inflation continued to be broad-based. Inflation in goods excluding food and energy had eased but continued to grow at a pace above its pre-pandemic average. Food inflation had slowed, but at close to 5%, it was still too high. Inflation in services excluding shelter had been trending down, but this appeared to be partly related to weakness in a few specific components, and underlying price pressures remained.

As in previous meetings, members discussed the impact of shelter price growth on overall inflation. Shelter price inflation, which includes mortgage interest costs, rent and components related to house prices, remained the biggest contributor to above-target inflation. Members expressed concern that, going forward, shelter price inflation would continue to keep overall inflation elevated. They discussed the risk that if the housing market rebounded more than expected in the spring of 2024, shelter inflation could keep CPI inflation materially above the target even while price pressures in other parts of the economy abated.

Overall, Governing Council expected economic growth to remain weak in the first half of 2024 before picking up in the second half. This was largely in line with their outlook from October. Inflation was expected to remain around 3% for the first half of the year before gradually easing and reaching the 2% target in 2025. Members were concerned that the persistence of core inflation could lead to slower-than-expected progress toward price stability.

Members also discussed the factors driving the recent rise in the overnight interest rate (the Canadian Overnight Repo Rate Average) above the policy rate target. Governing Council agreed that the most likely explanation for the pressure on the overnight rate was an increase in demand in financial markets for government bonds—and financing in the repo market for those positions—due to the widely held view that global bond yields had reached their peak. Members were clear that the need for overnight repo operations was an operational issue related to implementing monetary policy, rather than a change in the stance of monetary policy or a response to financial stability considerations. Members agreed to continue monitoring overnight funding markets and to use operational tools to keep the overnight interest rate close to the target rate that Governing Council sets at the fixed announcement dates for monetary policy decisions.

Considerations for monetary policy

Governing Council expected the economy to be weak in the near term. Members agreed that, if the economy evolved in line with this projection, it would likely lead to further easing in inflationary pressures. However, members remained concerned about the risks to the outlook for inflation, particularly the persistence of underlying inflation. They reviewed the indicators that they had been watching to assess the trajectory of underlying price pressures.

With respect to the balance between supply and demand in the economy, monetary policy was working largely as expected. Higher interest rates had slowed economic growth and allowed supply to catch up with demand. With growth expected to be just above zero in the near term, and with supply expanding largely due to population growth, the output gap would likely widen. Members agreed that this increase in economic slack would likely further relieve inflationary pressures.

Corporate pricing behaviour looked to be on a path toward normal. Both the frequency and the size of price changes reported by businesses had declined steadily.

In contrast, the decline in short-term inflation expectations had slowed, and these expectations remained elevated. Members noted that this probably reflected consumers’ recent experience with inflation—especially continued large increases in grocery prices and rising shelter costs. Members believed that consumers needed to see inflation come down further for expectations to decline.

Wage growth remained elevated compared with productivity growth. Members noted that wage growth is a lagging indicator of labour market activity and that a certain amount of catch-up in real wages was to be expected. For the economy as a whole, real unit labour costs were now above their prepandemic levels. Bank of Canada surveys had indicated that businesses were less worried about finding workers and that they expected wage growth to moderate. Members agreed that businesses had a variety of ways to absorb higher wages, but if real wages continued to grow significantly faster than productivity, it could add to inflationary pressures.

Overall, members agreed that these indicators painted a mixed picture of underlying inflation. More time was needed for past interest rate increases to relieve price pressures.

Governing Council also discussed the risks to the outlook for economic growth and inflation, and how these risks might influence the path of monetary policy.

Members discussed the risk that monetary policy could have a greater impact on consumer spending than expected, particularly as consumer confidence was already low. This could cause a marked contraction in economic activity, a larger and more rapid rise in the unemployment rate and more disinflationary pressure than expected. In this scenario, monetary policy would likely need to ease earlier and more quickly than anticipated.

Governing Council also saw a risk that inflation could be more persistent than expected, even with economic growth slowing and slack widening. This could happen if near-term inflation expectations remained elevated and the growth of unit labour costs and shelter costs did not moderate. In this scenario, monetary policy would need to remain restrictive for longer.

In sum, Governing Council agreed that they needed to continue to balance the risks of under- and over-tightening. While members did not want to make economic conditions more painful than necessary, they were particularly concerned about the persistence of inflation and did not want to lower interest rates prematurely, only to have to raise them again to get inflation back to the 2% target.

The policy decision

With the economy in excess supply, labour market conditions easing and corporate pricing behaviour normalizing, members agreed that monetary policy was likely sufficiently restrictive to achieve the inflation target. The current stance of monetary policy was relieving price pressures, but more time was needed to restore price stability. Short-term inflation expectations and wage growth remained elevated, and core inflation was still about 3½%. Governing Council therefore agreed to maintain the policy rate at 5%.

While they could not rule out further policy rate increases in the event of new inflationary surprises, members agreed that future policy discussions would likely shift to how much longer to maintain the policy rate at 5% to sustain the disinflationary process. They recognized that, based on the information that was available, it was difficult to foresee when it would be appropriate to begin cutting interest rates.

With inflation still too high and too broad-based, members wanted to be clear in their communications that they were still concerned about the persistence of underlying inflation.

Governing Council members agreed that they needed further evidence of progress toward price stability. They wanted to see clear downward momentum in underlying inflation. Members would closely monitor the evolution of core inflation and would remain focused on several key indicators, including:

• the balance of supply and demand in the economy
• corporate pricing behaviour
• inflation expectations
• wage growth relative to productivity

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