Tiff Macklem: Release of the Monetary Policy Report
Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press
conference following the release of the Monetary Policy Report, Ottawa, Ontario, 25
October 2023.
* * *
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 21⁄2% 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,
nearterm 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
31⁄2% 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.