This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on September 4, 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 August 29, 2024. 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.

International economy

Governing Council members began their deliberations by discussing how the global economy had evolved since the July Monetary Policy Report . Their discussion focused primarily on the outlook for growth and inflation in the United States and China.

In the United States, growth was higher than expected in July, mainly due to strength in consumption. The successive upside surprises in household spending were puzzling, particularly as the labour market had begun to slow. Members suggested that net wealth effects from strong equity markets, and the fact that existing mortgage holders had locked in low mortgage rates, could be supporting consumption. The low saving rate was viewed as a possible indicator of weakness going forward. Inflation in the United States had eased further.

In China, continued weakness in domestic demand had increased the downside risk to the growth outlook. Combined with the fact that export growth was unlikely to be sustained, this reduced the likelihood that official growth targets would be achieved. Members discussed the possibility that China was experiencing a secular slowdown in economic activity. Overproduction of industrial goods, such as steel, could put downward pressure on the prices of those goods.

Global financial conditions had eased further since July. Bond yields had declined as expectations solidified that the US Federal Reserve would soon cut rates. The Canadian dollar had appreciated modestly on the back of a weaker US dollar, and oil prices were lower than assumed in July.

Canadian economy and inflation outlook

Governing Council members then discussed recent data on economic activity and inflation in Canada. The economy had grown by 2.1% in the second quarter, which was stronger than anticipated in the July Report. This strength was due mainly to an increase in spending by governments as well as a boost to business investment that largely reflected temporary volatility in the aircraft and transportation equipment category. However, GDP per capita had fallen for the fifth straight quarter.

Household spending was weaker than anticipated in the second quarter. Overall consumption growth had slowed to 0.6%, and per capita consumption had contracted by 2.4% while population growth remained strong. Residential investment had also decreased in the quarter, with large declines in renovations and new construction. Members discussed whether weakness in consumption and housing could be due, in part, to caution on the part of households. The household savings rate remained well above pre-pandemic levels, suggesting consumers could be waiting for lower interest rates to make large purchases or enter the housing market, or they were saving in preparation for higher mortgage payments at renewal.

Members discussed recent dynamics in the labour market. Since their last meeting in July, the labour market had continued to weaken, with labour force growth outpacing employment growth. Layoffs remained muted, but unemployment had risen among newcomers to Canada and youth as new workers were having more difficulty finding a job. Wage growth remained elevated when compared with productivity growth. Members expected wage growth to ease in the months ahead given the slack in the labour market.

Consumer price index (CPI) inflation had eased further in July to 2.5%, in line with the Bank’s forecast. Core inflation measures continued to ease as well: CPI-trim had fallen to 2.7%, while CPI-median had decreased to 2.4%. The breadth of inflationary pressures had also waned: the share of CPI components growing above 3% was back to its historical level. Shelter price inflation remained the largest contributor to overall inflation. Members noted that this component showed early signs of easing, with growth in mortgage interest costs coming down and rent inflation edging lower from its recent peak. Inflation also remained elevated in some other services such as personal care and restaurants. The decline in CPI inflation in July relative to June mainly reflected lower inflation in services prices.

Overall, members agreed that the economy and inflation had evolved largely as anticipated in July. With continued excess supply in the economy pulling inflation down, inflation had eased as expected. GDP growth had picked up to about 2% in the first half of the year, slightly stronger than the Bank’s forecast. But preliminary indicators, including monthly GDP by industry, suggested that growth appeared to be soft in June and July. Members agreed this posed some downside risk to the forecast that growth would pick up later in the year.

Considerations for monetary policy

Governing Council members discussed the risks to the outlook for inflation and how these had evolved since the last meeting. Their discussion continued to focus on the opposing forces exerting upward and downward pressure on inflation, and what these mean for monetary policy.

Regarding the forces holding up inflation, members expressed confidence that things were evolving largely as expected. Shelter price inflation, which remained too high, had begun to slow. The risk that it would rise had diminished. A strong rebound in the housing market had not yet materialized and affordability constraints remained. Nevertheless, members observed that the housing market could still pick up more quickly than expected. Inflation in prices for services excluding shelter had also eased slightly in July, a sign of the diminished risk that these price pressures would persist. With wages growing faster than productivity, the risk also remained that labour costs could feed into services price inflation.

On the other side, excess supply in the economy continued to put downward pressure on inflation. Household spending and residential investment were weak, and the labour market had softened further. Per capita consumption could take longer than anticipated to rebound. Weakness in consumer spending could be exacerbated if businesses were to postpone hiring due to soft demand. This could delay the absorption of excess supply in the economy and weaken inflation more than expected.

Members discussed the balance of risks to the outlook for inflation. Some members took the view that the risks were balanced, with strength in shelter and services price inflation offsetting the downward pressure from excess supply. Some had become more concerned with the downside risks to inflation, particularly if the economy and labour market weakened further. Governing Council members agreed they would like to see the economy grow at a rate above potential output to begin taking up the slack in the economy so that inflation does not fall too much and instead settles close to the 2% target.

In this vein, members discussed scenarios in which these risks could materialize, and what that might mean for the stance of monetary policy:

• Lower interest rates could spur economic activity and the economy could rebound faster than anticipated in the latter half of 2024 and into 2025. The housing market could strengthen quickly, boosting house prices and shelter price inflation, and persistently elevated wage growth relative to productivity growth could prop up inflation in other services. In this scenario, it may be appropriate to slow the pace of further cuts in the policy rate.
• The economy and labour market may not pick up as anticipated or may even weaken further if consumption and residential investment do not strengthen as expected. Businesses could hold back on investment, given the rising risks to foreign and domestic demand. In such a scenario, it may be appropriate to lower the policy interest rate more quickly.

Members agreed that it was important to continue to make progress toward the inflation target. At the same time, they also agreed that with inflation approaching the target, they needed to increasingly guard against the downside risks to inflation stemming from weakness in economic activity.

Policy decision

Members agreed that with broad inflationary pressures continuing to ease, it was appropriate to reduce the policy rate further. They decided to cut the policy rate by another 25 basis points to 4¼%.

Governing Council members also discussed the future path for the policy rate. They agreed that if inflation continued to ease as expected, that it was reasonable to expect that the policy rate would decline further.

Given the countervailing forces working on inflation, members agreed that there was no pre-determined path for interest rates. They would proceed with decisions one meeting at a time, guided by incoming data.

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