Monetary Policy Report - Opening Statement of the Press Conference
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Today we cut the key rate by 25 basis points. This is our sixth consecutive cut and brings our base rate to 3%.
We also announced our plan to complete the normalization of our balance sheet, ending quantitative tightening. The bank will resume asset purchases in early March, starting gradually so that its balance sheet stabilizes this year and then begins to grow modestly in line with economic growth.
We have three main messages to convey this morning. First, inflation has been close to the 2% target since last summer. Monetary policy has helped restore price stability.
Second, low interest rates are stimulating household spending and increasing economic activity.
Third, the risk of a trade conflict caused by new U.S. tariffs on Canadian exports is a major uncertainty. This could significantly disrupt the Canadian economy and cloud the economic outlook. While it is impossible to predict the size and duration of a potential trade conflict, the projections in the Monetary Policy Report we released today provide a baseline forecast in the absence of tariffs. We also discuss the potential consequences of a major trade conflict.
Let me expand on the first two messages before addressing the threat of tariffs.
First, inflation. A year ago, inflation was 3%, short-term expectations were still high, and inflationary pressures were higher than normal. Inflation has been close to 2% in recent months, business and consumer expectations have largely normalized, and there are no longer any signs of broadly based inflationary pressures. House price inflation remains high but is gradually declining.
Although we expect some volatility in CPI inflation due to temporary fiscal measures, we expect inflation to remain close to the 2% target over the next two years.
Second, growth. There are signs that economic activity is picking up, with past interest rate cuts having had an impact on the economy. Lower borrowing costs are boosting activity in the housing market, as well as consumer spending on high-value consumer goods such as cars. The recovery in household spending has begun to spill over to other consumer goods and is expected to strengthen further. Business investment has been weak but is expected to gradually pick up. And export prospects are supported by new oil and gas export capacity.
Employment has strengthened in recent months. But with job creation lagging behind labor force growth for more than a year, the labor market remains soft. The unemployment rate was 6.7% in December and wage pressures, which have been stubborn, show signs of easing.
The bank expects GDP growth to strengthen from 1.3% in 2024 to 1.8% in 2025 and 2026. Per capita GDP growth is expected to accelerate as lower interest rates and rising incomes support spending. The projected increase in overall GDP growth is more modest than in October, largely due to weaker population growth reflecting new federal immigration policies. Our outlook is subject to risks, and the Governing Council is equally concerned about inflation rising above or falling below the 2% target. Absent the threat of tariffs, the risks to the inflation outlook are roughly balanced.
Let us return to the issue of tariffs. U.S. trade policy is a major source of uncertainty. Several scenarios are possible. We don't know what new tariffs will be imposed, when, and for how long. We don't know the extent of the recovery measures or fiscal support measures that will be imposed. And even when we know more about what's happening, it will still be difficult to be precise about the economic impact because we have little experience with tariffs of the proposed size. However, some things are clear. A long-term, large-scale trade dispute would seriously damage economic activity in Canada. At the same time, the higher cost of imported goods will exert direct upward pressure on inflation. The size and timing of the impact on output and inflation will depend largely on how businesses and households in the United States and Canada adjust to higher import prices.
Unfortunately, tariffs mean that the economy simply operates less efficiently: we produce and earn less than we would in the absence of tariffs. Monetary policy cannot compensate for this. What we can do is help the economy adjust. With inflation returning to around the 2% target, we are better placed to be a source of economic stability. However, with a single tool – our policy rate – we cannot count on lower output and higher inflation simultaneously. When considering our monetary policy response, we need to carefully assess the downward pressure on inflation from the weak economy and balance it against the upward pressure on inflation from rising input prices and supply chain disruptions.
Let me tell you what we are doing to prepare.
In recent years, we have invested in better information about supply chains, trade linkages and linkages between sectors. This helps us analyze the effects of supply disruptions, including tariffs. We have begun to assess the potential consequences of different tariff scenarios and present an example in this report.
We are increasing our outreach activities across the country to hear directly from those affected by trade uncertainty. This includes expanding our surveys of businesses and consumers to better understand how trade uncertainty is affecting their decisions and how they would respond in the event of a trade conflict.
We will keep you updated with our analysis and assessments as the situation evolves. By restoring low inflation and significantly reducing interest rates, monetary policy is better placed to help the economy adjust to new developments. As always, the Bank will be guided by its monetary policy framework and its commitment to maintaining price stability over time.
With that, the First Deputy Governor and I would be happy to answer your questions.
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