Monetary Policy Report Opening statement of the press conference

Hello. I am pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today’s policy announcement and the Monetary Policy Report (MPR).

Today, we increased the key interest rate by 50 basis points to 3.75%. This is the sixth consecutive increase since March. Quantitative tightening continues and completes the hikes in the key rate. We also expect our key rate to rise further. The extent of the continuation will depend on how monetary policy works to dampen demand, how supply issues resolve, and how inflation and inflation expectations react to this. tightening cycle.

Our decision today reflects several considerations.

First, inflation in Canada remains high and widespread. Inflation has come down over the past few months, but we have yet to see a general decline in price pressures.

Second, and in a related vein, the economy is still experiencing excess demand – it is overheating. Households and businesses want to buy more goods and services than the economy can produce, driving up prices.

Third, rising interest rates are beginning to weigh on growth. This is increasingly evident in interest rate sensitive sectors of the economy, such as housing and large spending. But the effects of the rate hike will take time to trickle down to the wider economy.

Fourth, there are no easy solutions to restore price stability. We need the economy to slow down to rebalance supply and demand and relieve price pressures. We expect growth to stagnate over the next few quarters, ie close to zero. But once we get through this downturn, growth will pick up, our economy will experience solid growth, and the benefits of low and predictable inflation will be restored.

Finally, we try to balance the risks of under-tightening and over-tightening.

If we don’t do enough, Canadians will continue to struggle with high inflation. And they will come to expect persistently high inflation, which will require much higher interest rates and potentially a severe recession to control inflation. Nobody wants that.

If we do too much, we could slow down the economy more than necessary. And we know that has a negative impact on people’s ability to repay their debts, on their jobs and on their businesses.

This tightening phase is coming to an end. We are getting closer, but we are not there yet.

We carefully assess the effects of higher interest rates on economic activity and inflation. And we are clear with Canadians and we are focused on the task entrusted to us: to restore price stability for the benefit of all.

Allow me to expand on these considerations and highlight key points from the Board of Governors’ deliberations.

The Board of Governors began by assessing international developments since the July MPR. Global inflation is high and increasingly widespread. With most central banks raising policy rates to control inflation, global financial conditions tightened rapidly. The global economy is slowing and we have revised down our global growth projection. We have also noted the emergence of financial tensions in certain markets in recent months.

A number of indicators suggest that global supply disruptions are easing. Oil and other commodity prices have also fallen since July. Combined with slowing global growth, these developments suggest that global inflation should decline over time. However, uncertainty is high, particularly related to Russia’s invasion of Ukraine, and there is potential for increased volatility in energy markets and further supply chain disruptions.

With regard to developments in Canada, the Board of Governors paid considerable attention to the assessment of inflation, inflation expectations and the balance between supply and demand in the ‘economy.

Since June, inflation in Canada has gone from 8.1% to 6.9%. While welcome, most of this decline reflects lower gasoline prices. Inflation in Canada is widespread, reflecting strong increases in the prices of goods and services. About two-thirds of the components of the consumer price index (CPI) have risen more than 5% over the past year. And rising prices for basic necessities like groceries and rent are hitting low-income Canadians especially hard.

Since short-term movements in headline CPI inflation are often dominated by swings in volatile international prices like oil prices, we are watching core inflation measures closely for signs of a downturn. easing price pressures in Canada. Our favorite core measures have stopped rising for the past two months, but they have yet to show clear evidence that core inflation is falling. Looking ahead, there are some encouraging early signs. Businesses said they expect the rate of price increases for the goods and services they sell to decline. And the more opportune 3-month core inflation rates have come down, although they still average around 4%. We will have to see these 3-month rates fall further, and these declines will continue.

We are also looking for evidence that short-term inflation expectations are easing and longer-term expectations are centered on our 2% target. Short-term expectations remain high and our surveys suggest that uncertainty about the path of inflation remains unusually high.

Looking at indicators of labor markets and economic activity, it is clear that even though the economy has started to slow, it remains in excess demand. Vacancies have fallen from their peak but remain high, and businesses continue to report widespread labor shortages. With the economy fully reopening, households want to take advantage of many local services they have missed, but businesses cannot keep up and we have seen service prices rise rapidly.

The rise in key interest rates is beginning to slow demand. Rising mortgage rates have contributed to a sharp slowdown in real estate activity from unsustainable levels, and consumer and business spending on goods is moderating. This has led to lower housing prices and is putting downward pressure on property prices.

Going forward, we expect the effects of rising interest rates to continue to ripple through the economy, moderating household spending and business investment. The slowdown in global growth, particularly in the United States, will also weigh on Canadian exports. We expect gross domestic product (GDP) growth to stagnate through the end of this year and into the first half of 2023 before picking up in the second half. Average annual GDP growth is therefore expected to decline from around 3¼% this year to just under 1% next year and around 2% in 2024. With growth below potential for several quarters, excess demand in the economy dissipates and the economy goes into oversupply. in 2023.

Bringing together the global and Canadian outlook, we expect inflation to hover around 7% in the last quarter of this year, drop to around 3% by the end of next year and return to the 2% target by the end of next year. by the end of 2024.

The Bank of Canada’s job is to ensure that inflation is low, stable and predictable. We are still far from this goal. We consider the risks surrounding our inflation outlook to be reasonably balanced, but with inflation so far above our target, we are particularly concerned about upside risks. We recognize that adjusting to higher interest rates is difficult for many Canadians. Many households are heavily indebted and higher interest rates add to their burden. We don’t want this transition to be more difficult than it should be. But we remain focused on our mandate. Higher short-term interest rates will lower long-term inflation. And going through this difficult phase will bring us back to price stability with sustained growth.

As we move forward, we will carefully monitor the impact of rising rates on spending and how this impacts pricing pressures. We will also monitor the resolution of global supply disruptions and the extent to which this translates into lower inflation in Canada. Finally, we will closely monitor inflation expectations to gauge how households and businesses are reacting to slower growth and spending.

With this summary, Senior Deputy Governor Rogers and I are now happy to answer your questions.

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