Thank you and good morning.
I'm very pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss the monetary policy report we published last week, as well as the decision we took. Last week, we maintained our policy interest rate at 5%. We are also continuing our policy of quantitative tightening.
Our message is twofold.
First, monetary policy is working to relieve price pressures, and we need to stay the course. Inflation is coming down as higher interest rates restrain demand in the economy. However, inflation is still too high, and underlying inflationary pressures persist. We need to give these higher interest rates time to do their work.
Second, with overall demand in the economy no longer running ahead of supply, our governing council's discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability to how long it needs to stay at the current level.
Let me give you some economic context for these considerations and talk about the implications for monetary policy.
Economic growth stalled in the middle of 2023. For many Canadians, the combination of higher prices and higher interests rates has been difficult. Past interest rate increases have helped the economy rebalance, and this is relieving price pressures. Lower energy prices and improvements in global supply chains have also helped to bring inflation down. Growth is expected to remain flat in the near term.
With weak demand in the economy, upward pressure on prices should continue to moderate, and inflation is expected to ease further. The share of CPI components that are rising faster than 3% has declined substantially and should continue to normalize. However, tightness in some parts of the economy is continuing to hold inflation up. The most prominent of these is housing. Inflation in shelter services remains high, close to 7%, because of rising mortgage interests costs, higher rents and other housing costs. While food prices are not increasing as fast as they were, food price inflation is still about 5%. Finally, inflation in services excluding shelter has improved, but there are signs that price pressures remain.
All this push-and-pull on inflation means that further declines in inflation will likely be gradual and uneven. That suggests that the path back to 2% inflation will be slow, and risks remain.
Overall, our outlook for both growth and inflation is largely unchanged from October. Growth is expected to be modest in 2024. It will be weak before picking up around the middle of the year and rising to about 2.5% in 2025.
With downward and upward forces largely offsetting in the near term, CPI inflation is expected to remain close to 3% over the first half of 2024. It's then expected to ease to about 2.5% by year end and return to target in 2025.
Let me give you a sense of the governing council's monetary policy deliberations.
At the time of our decision last week, there was a clear consensus to maintain the policy interest rate at 5%. We also discussed where we see the economy and inflation going and what that could mean for monetary policy going forward.
One thing is clear. The council's discussions are shifting from whether the rates are restrictive enough to how long to maintain them at their current level.
If new developments push inflation higher, we may still need to raise rates. However, if the economy evolves broadly in line with last week's projection, future discussions will be about how long the policy interest rate must remain at 5%.
The governing council is concerned about the persistence of strong underlying inflation. We want to see inflationary pressures continue to ease and clear downward momentum in underlying inflation.
We also discussed the risks to the economy and inflation. We're trying to balance the risks of over- and under-tightening. We don't want to cool the economy more than necessary, but we don't want Canadians to have to continue to live with elevated inflation, either. We remain focused on a number of indicators of underlying inflationary pressures, and we need to see further and sustained easing of core inflation. With the economy now looking to be in modest excess supply, demand pressures have abated and corporate pricing behaviour has continued to normalize. At the same time, measures of near-term inflation expectations and wage growth suggest that underlying inflationary pressures remain.
Let me conclude. We've come a long way from the inflation peak in 2022. Monetary policy is working and we need to continue to let it work. We remain resolute in our commitment to return inflation to the 2% target.
With that summary, Mr. Chair, we would be pleased to take your questions.
