Summary of Governing Council deliberations: Fixed announcement date of June 7, 2023

The Canadian economy and inflation outlook

Governing Council members began their discussion of the Canadian economy by reviewing their deliberations from the previous decision in April. At the time of that decision, members had maintained the policy interest rate at 4½% but had expressed concerns about whether monetary policy was proving restrictive enough to bring inflation sustainably back to the 2% target. Several of the previous concerns re-emerged, namely:

• the resilience of economic growth and the persistence of elevated core inflation
• concerns that the evolution of measures of underlying inflation was proving sticky and the decline in total consumer price index (CPI) inflation could stall
• the need to be forward-looking and not wait too long to ensure that monetary policy was restrictive enough

In that context, Governing Council assessed data that had come in since the April MPR, most notably:

• national accounts for the first quarter and more recent data, including housing
• March and April CPI
• labour market developments

Growth of gross domestic product (GDP) in the first quarter was 3.1%, above the Bank’s expectations of 2.3%. Consumption growth was surprisingly strong, coming in at 5.8%, with strength not only in services but also in goods sensitive to interest rates, such as automobiles, furnishings and other household products. Even after accounting for significant population gains, Governing Council agreed that consumption in Canada was proving stronger and more broad-based than had been expected. Business investment and exports also saw solid growth, while residential and inventory investment once again weighed notably on growth. Government spending grew, but somewhat less than had been anticipated.

Governing Council agreed that the economy remained clearly in excess demand and that the rebalancing of supply and demand was likely to take longer than previously expected. More recent data, particularly the increase in housing resales, suggested additional momentum in household sector demand. Growth in the second quarter was therefore viewed as likely to be stronger than forecast in the April MPR.

Governing Council members continued to characterize labour market conditions as tight. However, they saw some signs of easing, with employment growth and job vacancies moderating from very high levels. Employment in April increased by 41,000, a pace roughly in line with population growth. Higher immigration was expanding the supply of workers, but new workers were being quickly hired, reflecting continued strong demand for labour. As such, the unemployment rate remained near record lows.

Against this backdrop, some measures of wage growth had shown signs of easing, and the dispersion among various measures had widened. However, wage growth remained elevated across a variety of sectors and above rates that would be consistent with the 2% inflation target, absent a substantial increase in productivity. Governing Council expressed concern that productivity had in fact been declining.

Governing Council revisited developments in inflation over the past few months and discussed trends reflected in the CPI data:

• Headline inflation had ticked up from 4.3% in March to 4.4% in April and was broad-based. Governing Council had been expecting inflation to continue to decline. This was the first increase in 10 months.
• Year-over-year inflation in goods excluding food and energy also picked up in April—the first increase since September 2022. Food price inflation had come down somewhat but remained far too high.
• Looking over the past several months, Governing Council expressed concern that, while year-over-year core measures of inflation continued to decline, 3-month measures of core inflation were not showing a downward trend. These 3-month measures picked up slightly in April.
• Housing resale prices—which feed into the CPI with a 1-month lag—had increased for 3 consecutive months.

Given declines in energy prices and sizable base-year effects associated with some goods prices, Governing Council still expected that inflation would fall to about 3% this summer. However, the trends in the core inflation data raised doubts about the strength and durability of ongoing disinflation and increased concerns that inflation could become stuck at a level materially above the 2% target.