Monetary Policy Report - Opening Statement of the Press Conference

 
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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