Monetary Policy Report Press Conference Opening Statement

Good day. I am pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's policy announcement and the Bank of Canada's strategy. Monetary Policy Report (MPR).

Today we kept our policy interest rate at 5%. We also continue with our policy of quantitative adjustment.

Inflation has come down a lot since the summer of 2022, but as all Canadians know, inflation is still too high.

We held our policy rate steady today because monetary policy is working to cool the economy and ease price pressures, and we want to give it time to do its job. But further reduction in inflation is likely to be slow and inflationary risks have increased.

Let me expand on these topics 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 little different from what 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 sparked conflicts in Israel and Gaza. These wars are causing untold suffering. They are also hurting the global economy and adding uncertainty to the outlook.

In Canada, the economy has slowed and data suggests that supply and demand are now approaching balance. With the economy expected to reach oversupply this year and growth likely to be weak over the next few quarters, price pressures should ease further. We expect inflation to gradually decline and return to the 2% target in 2025. But we are concerned that higher energy prices and persistent core inflation are slowing progress.

Since our July MPR, we have seen clearer evidence that higher interest rates are moderating spending and rebalancing supply and demand. Economic growth has slowed over the past year, averaging around 1%. Household credit growth has softened, as has demand for housing and many durable goods. More recently, we are also seeing a slowdown in the services sector. With consumer spending expected to remain subdued through most of 2024, we have revised our growth outlook downward. Gross domestic product growth is forecast to remain below 1% for the next few quarters before recovering in late 2024 and rising to 2½% in 2025.

As you know, we pay close attention to indicators of the balance between supply and demand in the economy, and they now present a mixed picture. Output gap estimates suggest that the economy is now roughly in balance or even slightly oversupplied. Labor market indicators show it has eased considerably from overheated levels, but it still appears tight. Job vacancies have decreased but remain higher than normal, and the unemployment rate has increased slightly but remains low. Wage growth also remains high, between 4% and 5%. What is clearer is that demand pressures have eased more rapidly than we forecast in July.

So what does that mean for inflation? We are already seeing more evidence that tighter monetary policy is reducing pressures on prices for many goods and services. And since the economy already has or will soon have excess supply, there should be more downward pressure on inflation. But our near-term inflation outlook is higher. Let me explain.

The effects of higher interest rates are most evident in the prices of durable goods, such as furniture and appliances that people often buy on credit. And these effects have also extended to many semi-durable goods (a category that includes things like clothing and footwear), as well as many services that exclude accommodation. Inflation in these categories is now generally at 2% or less. Food price increases, while still high at almost 6%, have also moderated and are expected to moderate further.

Despite this, we have revised our inflation outlook upwards. Higher energy prices, structural pressures in our housing market and stickiness in underlying inflation are holding back 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. House price inflation exceeds 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 structural shortages in housing supply. Finally, near-term inflation expectations and wage growth remain high, and corporate price behavior is only slowly normalizing. All of this is making core inflation more persistent.

The combined impact of all these factors is that we now expect inflation to be around 3½% until the middle of next year. As excess supply in the economy increases, inflation should decline further in 2024 and reach 2% in 2025.

This forecast presents both upside and downside risks and the future path of inflation remains uncertain. Overall, inflation risks have increased since July. Today's forecast puts inflation on a higher trajectory than we expected. Furthermore, rising global tensions increase the risks. In a more hostile world, energy prices could rise sharply and supply chains could be disrupted again, driving up inflation around the world.

To be sure that our policy rate is high enough to bring inflation back to 2%, we need to see further easing in our core inflation measures. We remain focused on a number of indicators of underlying inflationary pressures, particularly the balance between supply and demand in the economy, inflation expectations, wage growth and corporate price performance.

With clearer evidence that monetary policy is working, the Governing Council's collective judgment was that we could be patient and keep the policy rate at 5%. We will continue to assess whether monetary policy is sufficiently restrictive to restore price stability and will monitor risks closely. Today's decision also reflected our best efforts to balance the risks of over- and under-adjustment. We don't want to cool the economy any more than necessary. But we also don't want Canadians to have to continue living with high inflation, and we cannot allow high inflation to take hold in the economy. If inflationary pressures persist, we are prepared to further increase our policy rate 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 function better for everyone.

With that summary, the Senior Lieutenant Governor and I will be happy to answer your questions.