This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on July 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 July 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 the prospects for global growth. Overall, their forecast had not materially changed since the April Monetary Policy Report . The global economy was expected to continue growing at around 3%, while inflation in major economies was forecast to continue easing gradually toward central bank targets.

Members exchanged views on the outlook for US economic growth and inflation. Recent data had indicated that the US economy had begun to slow in the first half of the year, largely due to the long-anticipated moderation in US consumer spending. A cooling labour market could further dampen consumption. At the same time, members discussed the risk that US consumption could rebound, given the persistence of earlier strength and retail trade data for June that had been stronger than expected. Inflation in the United States looked to have resumed its downward track, although there was still some stickiness in the growth of services prices.

In Europe, growth had come in a bit stronger following a weak 2023. Tourism was providing a boost to activity. Labour costs remained high and may have been contributing to services price inflation in the euro area. The extent to which these costs are passed through to prices or absorbed through tighter margins was uncertain. China’s domestic economy remained weak even as exports were strong. However, prospects for continued strong export growth were clouded by trade restrictions and tariffs.

Members discussed how financial conditions had eased since the April Report. Yields for short-term bonds had declined by around 50 basis points as markets increasingly anticipated that monetary policy would start easing in the United States. Corporate credit spreads remained narrow and corporate debt issuance was robust. Equity markets in the United States and Canada were resilient. The large gains in the US were mainly attributed to technology companies and the boom in artificial intelligence, but strength had recently spread to other sectors.

Expectations for monetary policy easing in the United States had recently led to lower bond yields, which had reduced the expected divergence in policy rates between the United States and Canada. Governing Council noted that the Can$/US$ exchange rate had been relatively stable and had not changed materially since the April Report. Global oil prices had been largely the same as assumed in April.

The Canadian economy and inflation outlook

Governing Council members turned their attention to the domestic economy. After weakness in the second half of 2023, GDP growth resumed in the first quarter of 2024. Recent data suggested positive but subdued GDP growth in the second quarter, largely driven by population growth. However, on a per-person basis, GDP appeared to have contracted. The economy clearly remained in excess supply, and there was room for economic growth to pick up without renewing inflationary pressures.

With population growth expected to ease, potential output growth would start to moderate in the second half of 2024. At the same time, GDP growth was forecast to increase, driven by exports and household spending. Members agreed that uncertainty about population growth was contributing to uncertainty about the economic outlook. Net flows of non-permanent residents (NPRs) had been revised up significantly from the April Report. NPRs as a share of the population was expected to rise in the near term before government policies to reduce this inflow take effect, but the timing and extent of reductions in net inflows was uncertain.

Members discussed various elements of the economic outlook.

Regarding consumption, rapid population growth had supported spending on necessities, whereas soft per-person spending had shown up in weak spending on discretionary items. Members discussed survey results that showed business expectations for future consumer demand were weak. Also, consumers continued to indicate caution in their spending and employment prospects. Still, members expected consumer spending to strengthen in 2025 even as population growth slowed. However, this outlook was clouded by differences among segments of the Canadian population. For instance, the impact on mortgage holders will depend on whether they have already faced changes in their mortgage rates. Some households could see income gains from interest-bearing savings, and some households could increase spending on interest-sensitive items as borrowing costs decline.

Members then discussed the housing market. Housing resale activity had been slower than expected, and new home construction had been weak as builders cited elevated costs, among other factors. Although residential investment was projected to increase substantially over 2025, members agreed that the imbalance between demand and supply was likely to persist for some time. This was expected to be particularly acute in urban rental markets where newcomers to Canada tend to settle.

Members spent considerable time discussing dynamics in the labour market. As the economy slowed, the unemployment rate had gradually risen to 6.4% in June. Several indicators showed that labour market slack had emerged:

• While prime-age workers had seen limited impact on their job prospects, it had become harder for new entrants to the labour force—young workers and newcomers to Canada—to find work.
• Job vacancies had come down to around their historical average and the job finding rate had declined.
• The Canadian Survey of Consumer Expectations indicated increased pessimism about job prospects. In particular, respondents believed the probability of losing their jobs had gone up.
• Respondents to the Business Outlook Survey from all sectors and regions reported that the labour market had continued to ease. The number of firms citing labour shortages was near survey lows.

Members agreed that slack in the labour market was expected to persist as labour force growth would continue to outpace employment growth in the near term.

Recent measures of wage growth had been volatile and were sending mixed signals. Overall, wage growth remained elevated at around 4%, well above productivity growth. According to the Labour Force Survey, wage growth in the public sector had picked up while it had been easing in the private sector. Members interpreted this difference as evidence that public sector contracts had taken longer to catch up to the higher cost of living. Wage growth was expected to moderate given the presence of labour market slack and weak labour productivity.

GDP growth was expected to pick up in the second half of the year and continue expanding by around 2¼% over the next two years. This forecast is largely driven by renewed strength in residential investment and consumption, as well as a boost in exports. The Trans Mountain Expansion pipeline should facilitate more shipments of oil. Also, motor vehicle exports are expected to rebound after plant retooling.

Residential and business investment was forecast to expand due, in part, to easier financial conditions. Spending by all levels of government was expected to contribute importantly to growth over the projection. Excess supply was expected to be gradually absorbed over the projection horizon as GDP growth picks up and potential growth moderates, primarily due to slower population growth.

Governing Council members then discussed the outlook for inflation. Consumer price index (CPI) inflation had been within the 1% to 3% range since January. After edging up in May, it eased to 2.7% in June. The Bank’s preferred measures of core inflation had eased meaningfully since the April Report and had also now been within the inflation-control range for a few months. Members noted that inflation had become less broad-based across goods and services—the share of components growing above 3% was close to its historical average.

Shelter prices remained the largest contributor to overall inflation. Strong demand for housing and limited supply would continue to put upward pressure on rent. Mortgage interest costs had eased slightly from very high levels. Rent inflation had risen further to close to 9% in June. After being well below its historical average since the second half of last year, inflation in services excluding shelter also increased. This was largely because telecommunications prices were not falling by as much as they had been. Inflation in other services more clearly linked to labour costs has remained elevated.

Overall, members expected core inflation to ease gradually to about 2.5% in the second half of this year and then ease further in 2025. Because of base-year effects from gasoline and some durable goods, total CPI inflation was projected to fall below core in the second half of this year and then edge up to be above core in early 2025, as base-year effects fade. CPI inflation was expected to ease to the 2% target in the second half of 2025.

Considerations for monetary policy

Governing Council members then discussed the risks to the outlook for growth and inflation and their implications for monetary policy. Since the end of 2023, both total and core inflation had eased gradually toward the target. Members agreed that restrictive monetary policy had worked to relieve price pressures, and that it would continue to exert downward pressure on inflation.

In this context, members shared a variety of perspectives on the risks to the outlook for inflation and the forces that could push inflation up or pull it down. The downside risks to inflation took on a greater importance in their deliberations than they had in prior meetings.

The economy had been growing more slowly than the rate of population growth, so excess supply had built up. Demand was being generated by the formation of new households, but it was weak overall, with high interest rates weighing on consumer spending and investment. Various indicators pointed to the emergence of slack in the labour market.

Members acknowledged that consumer sentiment had been weak and that survey responses indicated this weakness could continue. Spending per person was expected to recover as borrowing rates declined, but many households will still face significant debt-servicing costs. There is a risk that consumer spending could be significantly weaker than expected in 2025 and 2026 given the number of households likely to be renewing their mortgage at higher rates. With the emergence of slack in the labour market, some members expressed concern that further weakness in the labour market could delay the rebound in consumption, putting downward pressure on growth and inflation.

While excess supply was projected to persist into 2026, some members emphasized that the amount of excess supply in the economy was uncertain. The output gap could currently be smaller than assumed, and excess supply could be absorbed quickly when growth picks up.

Regarding the forces pulling inflation up, members focused on the stickiness of services price inflation. On prices for shelter services, members expressed concern that imbalances in the housing market would persist or worsen because of an increase in demand for housing. Declining mortgage rates or higher-than-expected population growth could add to demand. Potential delays in building more homes could limit the growth of supply. Nonetheless, concerns had decreased that pent-up demand would lead to a sudden rise in house prices with cuts in the policy interest rate. Housing affordability challenges could have played a greater-than-expected role in dampening demand. However, affordability challenges could leave more people in the rental market, putting upward pressure on rents.

Members also spoke about elevated inflation in some other services and what might contribute to holding it up going forward. They agreed that remaining price pressures in services that are more closely affected by wages were unlikely to be offset to the same extent as in past months by disinflation in goods or price decreases in services such as telecommunications.

Some members shared concerns that wage growth at current levels—well above the pace of productivity growth—could lead to persistent price pressures for many services. For many firms in service industries, the growth of costs had been running ahead of the growth in prices, increasing the possibility that these higher input costs would be passed on to consumers. Other members placed less emphasis on the risk that wage growth would contribute to price pressures. They felt that even if firms passed on higher input costs to consumers, the impact on inflation was expected to be relatively small. With slack in the labour market, they expected wage growth to moderate. They also raised the possibility that, with overall profit margins still above historical averages, firms could absorb the added labour costs and would be reticent to raise prices given weak demand.

When inflation was well above target, Governing Council members were particularly focused on upside risks to the outlook for inflation. In July, with core and CPI inflation within the control range for several months, and with inflation moderating and forecast to ease toward the target, members agreed they now needed to be as focused on the downside risks as the upside risks. With more excess supply in the economy and slack emerging in the labour market, downside risks to the outlook for inflation had also increased.

The policy decision

Members agreed that while inflationary pressures in shelter and other services could hold CPI inflation above the target for longer, they felt increasingly confident that the ingredients for price stability were in place. They also expressed that a pickup in economic growth was needed to sustainably achieve the inflation target over the projection horizon. Given the balance of risks, members agreed that while restrictive monetary policy was still required to address remaining price pressures, it should not be as restrictive. Members therefore agreed to further reduce the policy rate by 25 basis points to 4.5%.

Governing Council members also discussed the expected future path for the policy rate. With inflation closer to target and downside risks to the outlook for inflation becoming more prominent, there was clear consensus that it would be appropriate to lower the policy rate further if inflation continued to ease in line with the projection.

The countervailing forces pushing inflation down and pulling it up meant that progress could be bumpy, and there could be setbacks in progress toward the target. Members expressed a range of views on how these forces might play out over time and the implications for the timing of future cuts to the policy interest rate. Given these uncertainties, they agreed there was no predetermined path for the policy rate. They would take decisions one meeting at a time.

Members discussed what they would be watching as they approached future decisions and how to describe this in their communications. They agreed that the indicators of underlying inflation they had been following since June 2023 had been a useful dashboard for their decisions while the economy moved from excess demand into excess supply and inflation was above the 1% to 3% range. Now, with both total and core inflation within the inflation control range, they agreed that they needed to put more emphasis on the symmetric nature of the inflation target. They also agreed to clearly communicate that they would be weighing the forces that could pull inflation below the target against those that could hold it above the target.

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