This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on June 7, 2023.

This summary reflects discussions and deliberations by members of Governing Council in stage three of the Bank’s monetary policy decision-making process. This stage takes place after members have received all staff briefings and recommendations.

Governing Council’s policy decision-making meetings began on Friday, June 2. The Governor presided over these meetings. Members in attendance were Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers, and Deputy Governors Paul Beaudry, Toni Gravelle, Sharon Kozicki and Nicolas Vincent.

The international economy

Governing Council began by discussing recent global economic developments. On balance, global growth has evolved broadly in line with the projection in the April Monetary Policy Report (MPR), and rising interest rates are weighing on growth in most regions.

In both the United States and the euro area, economic growth was slowing and headline inflation was coming down as energy prices fell. However, core inflation in both regions showed little to no decline.

Governing Council reflected on some common themes that were evident across advanced economies: namely tight labour markets, slow progress in bringing core inflation down and—in North America—surprisingly resilient consumer spending. These occurred despite rapid and significant monetary policy tightening by central banks over the past year.

Governing Council members revisited their April discussions about the banking sector stress in the United States and Europe. Members agreed that the risk of re-emerging or more acute stresses remained, but this probability had decreased. With an agreement on the debt ceiling reached and the banking stress receding, market attention was returning to core macroeconomic developments, inflation and monetary policy.

The Chinese economy had rebounded in the first quarter, after the pandemic restrictions had been lifted. However, growth was led by services consumption and public investment, with relatively less strength in goods consumption, exports and business investment. If this mix of activity were to continue, China’s growth would be less commodity-intensive, limiting the growth in the global demand for commodities.

Governing Council noted that the Bank’s commodity price index was down about 10% since the April MPR, largely because of lower oil prices. Global financial conditions tightened back to roughly where they were before the banking stress in March.

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.

Considerations for monetary policy

Governing Council members reflected on the concerns they had outlined during their April deliberations and discussed whether the accumulation of evidence now indicated that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.

Despite higher interest rates, consumer demand was proving more robust than Governing Council had expected. This was evident in the national accounts data for the first quarter—which showed that consumption growth was very strong—and in recent increases in housing resales and prices.

Members explored several possible explanations for the strength in household spending:

• Given that real interest rates have only recently become restrictive despite the substantial increases in the Bank’s policy rate over the past year, the full effects of past monetary policy tightening have yet to be felt.
• The lags in the transmission of monetary policy may be longer than normal because of pent-up demand for services and improvements in supply chains for goods. Once these countervailing forces subside, the full impact of higher interest rates would occur.
• Excess savings and tight labour markets were mitigating some of the impact of higher interest rates. Members noted that services price inflation remained elevated and labour markets tight.
• Strong population growth and seasonal adjustment factors may also be playing a role.

While it was impossible to declare any one explanation as predominant, members were of the view that with the resurgence in household spending growth, the pickup in consumer confidence, and the slowing in disinflationary momentum, monetary policy did not look to be sufficiently restrictive.

They acknowledged that new information on the evolution of inflation expectations or corporate pricing behaviour was limited.

Governing Council continued to expect that lower energy prices and base-year effects would contribute to inflation easing to about 3% this summer. However, all members felt that a broad range of indicators had increased their concern that the disinflationary momentum needed to bring inflation back to the 2% target could be waning. Governing Council had been concerned in April about this second stage of disinflation being more difficult, and data available since had tipped the balance of risks to the inflation outlook to the upside.

The policy decision

Members therefore agreed that a further increase in the policy rate was required. At the April decision meeting, Governing Council had actively considered raising the policy rate. At the June decision, enough evidence had accumulated since January to convince them that policy needed to be more restrictive to rebalance supply and demand in the economy and bring inflation all the way back to the 2% target.

The discussion turned to whether it was appropriate to raise the policy rate at this decision or to wait and signal that the policy rate was likely to be increased at the July decision. Governing Council debated the merits of these options.

On the one hand, additional data would be released over the coming month, notably on inflation and the labour market, which may or may not reinforce the need to increase the policy rate. By signalling and waiting, Governing Council could gain greater assurance that more restrictive policy was needed.

On the other hand, members felt that enough data had accumulated to convince them that more restrictive policy was needed. Therefore, it was preferable to take the required action and continue to assess economic developments to guide future actions.

Governing Council agreed to increase the target for the overnight rate to 4¾% and assess the need for further policy rate increases based on the incoming data. Members also reviewed the Bank’s quantitative tightening program and agreed to continue the current policy of normalizing the balance sheet by allowing maturing bonds to roll off.

Governing Council recognized the importance of communicating clearly what it would be assessing as it approached future decisions. This allows both the Bank and market participants to assess incoming data and their implications for economic growth and inflation.