This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on March 6, 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 March 1. 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 began its deliberations by reviewing recent data on the global economy since the January Monetary Policy Report . Growth had slowed in most regions. In the United States, economic activity also slowed but remained surprisingly strong. Consumption was buoyed by a healthy labour market, while exports and government spending continued to support growth.

Growth in the euro area had been barely positive, with both soft consumer sentiment and tight monetary policy restraining demand. In China, growth slowed as expected in the fourth quarter of 2023, with weaker investment activity, particularly in the property sector.

Inflation had continued to ease in both the United States and the euro area. Supply conditions in both regions had improved and core inflation had eased, with clear downward momentum in goods prices and some evidence of softening service price inflation.

Governing Council discussed the implications of stronger US consumption for inflation in that country. Strong potential output and a tight labour market had been holding up spending in the United States. Members debated the likelihood of continued strength in the US labour market, which could lead to more persistent strength in consumption. The extent to which a strong labour market increases price pressures depends on the outlook for productivity, which had been stronger in the United States than in most other regions.

Governing Council noted that oil prices had edged up in the weeks preceding the March decision and were slightly higher than the assumption in the January Report.

Financial conditions around the time of the rate decision reflected market sentiment that a soft landing was becoming more likely and that central bank policy rates may not come down as much or as quickly as market participants had assumed. Equity markets were strong and credit spreads had narrowed since the January Report. Strength in Canada and US equity markets could provide a boost to consumer sentiment.

The Canadian economy and inflation outlook

Governing Council members discussed recent data on the Canadian economy, particularly the National Accounts data for the fourth quarter of 2023. Growth in gross domestic product (GDP) was somewhat higher than projected in the January Report, led by stronger exports, but the pace of growth remained well below potential. Final domestic demand declined in the quarter, with modest consumption growth and a marked contraction in business investment. Overall, economic growth was essentially flat during the second half of 2023, which Governing Council members agreed was consistent with their January outlook.

Members noted that initial (or “flash”) GDP data for January suggested a strong bounce-back in growth following public sector strikes in Quebec in late 2023. However, they agreed that there were not enough data to reassess growth in the first quarter ahead of the April projection.

Governing Council also discussed the drivers of the recent strength in exports. Members acknowledged that some of the export growth was the result of continued US demand, and that some may reflect Statistics Canada’s revised methodology that now includes more spending by non-residents in Canada in the exports data.

Labour markets continued to ease gradually, with employment growing more slowly than the population. Governing Council members noted that recent data were beginning to show signs of easing wage pressures. For example, the most recent Survey of Employment, Payrolls and Hours (SEPH) showed further moderation in average hourly earnings growth. SEPH wage measures have shown more easing on average over the past several months than wage measures in the Labour Force Survey. Also, National Accounts data showed that compensation of employees rose an annualized 3.2% in the fourth quarter of 2023, the slowest growth rate since the second quarter of 2020.

Governing Council members expressed concern that the housing market continued to pose upside risks to the inflation outlook. While house prices continued to fall in January, recent strength in resales could translate into a pickup in house prices and stoke shelter price inflation.

Members held a detailed discussion on the indicators of inflation. They noted that consumer price index (CPI) inflation had eased to 2.9% in January, roughly as expected at the time of the January Report. The slowing inflation was entirely due to widespread weaker price growth in goods categories of the CPI, with little change in services price inflation. Food price inflation continued to slow in response to easing input costs, while semi-durables saw price declines in January.

Members discussed the challenge of defining underlying inflation, a term the Bank has been using to explain the forces that influence the trend of CPI inflation. They agreed that underlying inflation is not measured by a single statistic but rather by a collection of indicators. These indicators include, among others, measures of core inflation (including the Bank’s preferred measures—CPI-trim and CPI-median—and others that exclude volatile components, such as CPI excluding food and energy), and the distribution of inflation rates across components of the CPI basket.

Indicators of underlying inflation were suggesting slow progress getting inflation down to target. The share of components of the CPI growing above 3% continued to decline but was still close to 45% and significantly above the historical average. The Bank’s preferred measures of core inflation were both lower, at 3.4% for CPI-trim and 3.3% for CPI-median, but still above 3% on a 12-month, 6-month and 3‑month basis. Overall, Governing Council members saw nothing in the data that would change their view that CPI inflation will remain around 3% in the coming months.

As in previous meetings, members discussed the impact of the growth in shelter prices on overall inflation. Shelter price inflation, which includes mortgage interest costs, rent and components related to home ownership, remained high at 6.2% in January and continued to be the biggest contributor to total CPI inflation. Members agreed that recent housing market indicators suggested this is likely to persist, which would mean that high shelter costs continue to be an important contributor to CPI inflation.

Members discussed how they should consider the impact of persistently high shelter cost increases, which could make it more difficult to get inflation all the way back to 2%.

They recognized that increases in the Bank’s policy rate have pushed up mortgage interest costs, which are an important driver of shelter price inflation. Given the mortgage renewal cycle, higher mortgage interest costs will have a persistent, but not permanent, effect on CPI inflation. Members agreed that if mortgage interest costs were the only component holding up inflation, there could be some capacity to look through them, so as not to unduly restrain economic activity to get headline inflation back to 2%. However, this was not the current situation. Most components of shelter inflation, such as rent and expenses related to home ownership (including insurance, taxes and repairs), were still rising significantly in January. Moreover, recent data had made it clear that inflationary pressures were still broad-based, and underlying inflation had yet to show sustained downward momentum.

Considerations for monetary policy

Council members shared their views on what they will be looking for as they assess the stance of monetary policy, and they concluded the most important thing is further and sustained progress in 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, there was agreement that monetary policy was working largely as expected. Higher interest rates were continuing to slow economic growth, allowing supply to catch up with demand. Members agreed that a widening output gap, if sustained, would continue to relieve inflationary pressures.

Wage growth remained elevated compared with productivity growth. Members agreed that if real wages continued to grow significantly faster than productivity, it could add to inflationary pressures. However, they noted the early signs of moderation in wage growth in the most recent SEPH and National Accounts data.

Survey data leading up to the January Report had indicated that corporate pricing behaviour was gradually normalizing. With no new data since the January policy rate decision, Governing Council did not update their views on the pace and size of price increases. There were also no new data on inflation expectations of consumers and businesses. Members noted that more information on these two important indicators of inflation will be available before the April projection and decision.

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.

• A key risk to the outlook is that inflation may be more persistent than expected. The Bank’s preferred measures of core inflation had yet to show much downward momentum. Households’ near-term inflation expectations also had not eased meaningfully. While there were early signs that wage growth had begun to decelerate, productivity growth had been very weak, and therefore unit labour costs had remained elevated. If the housing sector rebounds in the spring, shelter price inflation could be pushed up, delaying the return of CPI inflation to the 2% target. If inflation proves more persistent than expected, monetary policy would likely need to remain restrictive for longer.
• There is also the risk that monetary policy could have a greater-than-expected impact on consumer spending. 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 may need to ease earlier and more quickly than anticipated. Members agreed this risk remained but was less likely, given recent GDP data.
• Members agreed that the associated risk of a sharp rise in unemployment had also diminished. Conditions in the labour market had continued to move into better balance, and various indicators suggest a gradual, rather than sudden, slowdown.
• Globally, risks to energy prices and transportation costs related to conflicts remained elevated. While shipping costs and delivery times had increased, spare capacity in the shipping sector and weaker global demand had been mitigating the effect.

In sum, Governing Council members agreed that they needed to continue to balance the risks of waiting too long to lower rates, thus making economic conditions weaker than necessary, against lowering rates prematurely and potentially squandering the progress made toward price stability.

The policy decision

Members agreed that the current stance of monetary policy was doing its work to slow economic growth and relieve price pressures, but that more time was needed to restore price stability. Governing Council therefore agreed to maintain the policy rate at 5%.

In their discussions, members reiterated their view that it was still too early to consider lowering the policy interest rate. Recent inflation data suggested monetary policy is working largely as expected. But future progress on inflation is expected to be gradual and uneven, and upside risks to inflation remain.

There was also consensus about the conditions Governing Council was looking for to lower the policy rate. Members agreed that if the economy evolves in line with the Bank’s projection, the conditions for rate cuts should materialize over the course of this year. However, there was some diversity of views among Governing Council members about when there would likely be enough evidence that these conditions were in place, and how to weight the risks to the outlook.

Members agreed they need to see further and sustained easing in underlying inflation. They will closely monitor the evolution of core inflation and 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 members noted that market pressures on the overnight rate that were seen in January had mostly eased. The Bank had not conducted overnight repo operations to reinforce the target for the overnight rate since late January. Members concluded that the pressures seen in January were not at their root caused by quantitative tightening, and therefore did not indicate a need to change the Bank’s approach. Governing Council agreed to continue its policy of normalizing the balance sheet by allowing maturing bonds to roll off.