Good morning. I’m pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today’s policy announcement and the Bank of Canada’s Monetary Policy Report (MPR).
Today, we maintained our policy interest rate at 5%. We are also continuing our policy of quantitative tightening.
Inflation has come down a lot since the summer of 2022, but as every Canadian knows, inflation is still too high.
We held our policy rate steady today because monetary policy is working to cool the economy and relieve price pressures, and we want to give it time to do its job. But further easing in inflation is likely to be slow, and inflationary risks have increased.
Let me expand on these themes and talk about the implications for monetary policy.
Global economic growth is slowing as expected as higher interest rates and tighter financial conditions restrain demand. But the composition is a bit different than we forecast in July. The US economy has been surprisingly strong, while China has slowed more than expected. At the same time, geopolitical tensions have increased. The Russian war of aggression against Ukraine continues, and Hamas attacks in Israel have ignited conflict in Israel and Gaza. These wars are causing incalculable suffering. They are also hurting the global economy and adding uncertainty to the outlook.
In Canada, the economy has slowed, and the data suggest demand and supply are now approaching balance. With the economy expected to move into excess supply this year and with growth anticipated to be weak for the next few quarters, price pressures should ease further. We expect inflation to ease gradually and return to the 2% target in 2025. But we’re worried that higher energy prices and persistence in underlying inflation are slowing progress.
Since our July MPR, we’ve seen clearer evidence that higher interest rates are moderating spending and rebalancing demand and supply. Economic growth has slowed over the past year, averaging about 1%. Household credit growth has softened, and so has demand for housing and many durable goods. More recently, we are seeing the services sector slow as well. With consumer spending expected to remain subdued through most of 2024, we’ve revised down our growth outlook. Growth in gross domestic product is forecast to remain below 1% for the next several quarters before picking up in late 2024 and rising to 2½% in 2025.
As you know, we pay close attention to indicators of the balance between demand and supply in the economy, and these are now presenting a mixed picture. Estimates of the output gap suggest the economy is now roughly in balance or even in slight excess supply. Indicators of the labour market show it has eased considerably from overheated levels but still looks to be on the tight side. Job vacancies have eased but remain higher than normal, and the unemployment rate has risen a bit but is still low. Wage growth also remains elevated at 4% to 5%. What is clearer is that demand pressures have eased more quickly than we forecast in July.
So what does that mean for inflation? We are already seeing more evidence that tighter monetary policy is reducing price pressures for many goods and services. And with the economy already or soon to be in excess supply, more downward pressure on inflation should be in the pipeline. But our outlook for near-term inflation is higher. Let me explain.
The effects of higher interest rates are most evident in the prices of durable goods, like furniture and appliances that people often buy on credit. And these effects have also spread to many semi-durables—a category that includes things like clothing and footwear—as well as many services excluding shelter. Inflation in these categories is now running generally at or below 2%. Price increases for groceries, while still elevated at almost 6%, have also eased and are expected to moderate further.
Despite this, we’ve revised up our outlook for inflation. Higher energy prices, structural pressures in our housing market and stickiness in underlying inflation are all slowing the return to target.
Higher global oil prices have driven up gasoline prices, and we now expect oil prices to remain higher than we assumed in July. Inflation in shelter prices is running above 6%. Part of this is due to higher mortgage interest costs following increases in our policy interest rate. But it also reflects higher rents and other housing costs, and these pressures are more related to the structural shortage of housing supply. Finally, near-term inflation expectations and wage growth remain elevated, and corporate pricing behaviour is normalizing only slowly. All this is making underlying inflation more persistent.
The combined impact of all these factors is that we now expect inflation to be about 3½% through to about the middle of next year. As excess supply in the economy increases, inflation should ease further in 2024 and reach 2% in 2025.
There are both upside and downside risks to this forecast and the future path for inflation remains uncertain. Overall, inflationary risks have increased since July. Today’s forecast has inflation on a higher path than we expected. In addition, rising global tensions are increasing risks. In a more hostile world, energy prices could move sharply higher and supply chains could be disrupted again, pushing inflation up around the world.
To be confident that our policy rate is high enough to get inflation back to 2%, we need to see more easing in our measures of core inflation. We remain focused on a number of indicators of underlying inflation pressures, particularly the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour.
With clearer evidence that monetary policy is working, Governing Council’s collective judgment was that we could be patient and hold the policy rate at 5%. We will continue to assess whether monetary policy is sufficiently restrictive to restore price stability, and we will monitor risks closely. Today’s decision also reflected our best efforts to balance the risks of over- and under-tightening. We don’t want to cool the economy more than necessary. But we don’t want Canadians to have to continue to live with elevated inflation either—and we cannot let high inflation become entrenched in the economy. If inflationary pressures persist, we are prepared to raise our policy rate further to restore price stability.
We’ve made a lot of progress, but we’re not there yet. We need to stay the course. When price stability is restored, the economy will work better for everyone.
With that summary, the Senior Deputy Governor and I would be pleased to take your questions.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
