We're very pleased to be here together to discuss today's monetary policy decision. Today, the governing council maintained the policy interest rate at 2 and a quarter percent. Since our April decision, the economic impact of the ongoing conflict in the Middle East has increased. Higher energy prices and disruptions in global supply chains are weighing on global growth and pushing up inflation worldwide. At the same time, the US administration continues to propose new tariffs and trade policy uncertainty remains elevated.
Against this backdrop, the Canadian economy has remained soft and inflation has increased. Monetary policy continues to be focused on ensuring that higher energy prices do not turn into persistent inflation while helping the economy adjust to headwinds. We are committed to keeping inflation low and stable over time.
The council maintained the policy interest rate at 2 and a quarter percent. Since our decision, the economic impact of the ongoing conflict in the Middle East has increased. Higher energy prices and disruptions in global supply chains are weighing on global growth and pushing up inflation. At the same time, the American administration continues to propose new tariffs and trade policy uncertainty remains elevated.
Against this backdrop, the Canadian economy has remained soft and inflation has increased. Monetary policy continues to be focused on ensuring higher energy prices do not turn into persistent inflation, while at the same time helping the economy adjust to headwinds. We are committed to keeping inflation low and stable over time.
So, let me expand on what we're seeing since the April monetary policy report and the implications for monetary policy. The conflict in the Middle East is slowing economic activity in the Gulf region and in many oil importing countries and sending inflation higher worldwide. At the same time, AI related investment is boosting growth in the United States and some Asian economies and equity prices have been buoyant.
In Canada, GDP edged down 0.1% in the first quarter, weaker than expected at the time of the April report. Consumer spending grew by 1.4% but there was an unexpected pullback in government spending. Housing activity also declined and business investment remained weak. While the labor market strengthened in May and the unemployment rate fell to 6.6%, there's been a lot of volatility in the monthly job numbers. When you look through the bumpiness, employment in Canada is little changed since the start of the year and the unemployment rate has been fluctuating in the 6 and a half to 7% range.
Recent data suggests GDP growth will resume in the second quarter with continued increases in consumer spending and more stability in the housing market. Even with some rebound in GDP growth, we expect the economy to remain in excess supply.
As anticipated, CPI inflation rose in April, reaching 2.8%. The increase reflects energy prices, both higher global oil prices and the impact of the elimination of the Canadian consumer carbon tax falling out of the 12-month rate of inflation. So far, there's been limited evidence of broad-based pass through of higher energy prices to other consumer prices. Measures of core inflation have moved down to around 2% and the share of CPI components growing above 3% is close to its historical average. Food price inflation moderated but remains high and shelter inflation continued to slow.
With the conflict in the Middle East persisting, oil prices have remained elevated. Market expectations have shifted up since April and oil prices are roughly $10 a barrel higher than we assumed in the MPR. Based on this, we expect CPI inflation to hover close to 3% in coming months before easing gradually towards 2%. We will be watching closely for evidence of a broadening in price pressures. The bank is committed to keeping inflation close to the 2% target over time.
At our meeting this week, we decided to maintain the policy rate at 2 and a quarter percent. Governing council agreed to look through the war's near-term impact on inflation, but if energy prices stay high, we will not let their effects become broad-based persistent inflation.
Economic weakness combined with rising inflation is a dilemma for monetary policy. Raising rates to dampen inflation could further slow the economy. Easing rates to support growth increases the risk that higher inflation becomes persistent. Holding the policy rate unchanged balances those risks. However, uncertainty is unusually elevated and the risks could shift. Monetary policy may need to be nimble.
If the United States imposes significant new trade restrictions on Canada, we may need to cut the policy rate further to support economic growth. Alternatively, if the conflict in the Middle East continues and higher energy prices start leading to ongoing generalized inflation, monetary policy will have more work to do. That may need consecutive increases in the policy rate. These are not the only possible outcomes. The Canadian economy is working through a period of structural change.
Economic weakness combined with rising inflation is a dilemma for monetary policy. Raising rates to dampen inflation could further slow the economy. Easing rates to support growth increases the risk that higher inflation becomes persistent. For now, holding the policy rate unchanged balances those risks. However, uncertainty is unusually elevated and the risk could shift. Monetary policy may need to be nimble.
If the United States imposes significant new trade restrictions on Canada, we may need to cut the policy rate further to support economic growth. Alternatively, if the conflict in the Middle East continues and higher energy prices start leading to ongoing generalized inflation, monetary policy may have more work to do. There may be a need for consecutive increases in the policy rate. Of course, these are not the only possible scenarios. The Canadian economy is working through a period of structural change. Shifting trade relationships, the adoption of AI, and changes in demographics complicate the assessment of the economy.
We're going to be watching all these developments closely and assessing their implications for growth and inflation. And as the outlook evolves, we stand ready to respond as needed. The bank is committed to ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. And with that, the two of us would be very pleased to take your questions.
Okay. Thank you, Governor. We will go to questions now. We'll start with the reporters who are here in Ottawa at the bank and then we'll go to those who have joined us remotely. As usual, I'm going to ask you to please limit yourself to one question so that every media outlet has the chance to participate. If I forget to do so, please state your name and affiliation.
CJ Lubier, please give your name and affiliation before asking your question and of course you are able to ask questions. I'm going to start with David Lungren from Thompson Reuters. Please.
Good morning. You say you're going to look through the near-term impact of energy prices lifting overall inflation, but at what point do you stop looking through the near-term impact? Is it one, two, three, four inflation prints in a row that you don't like or suddenly the number spiking?
David, it's less about a timeline and it's more about the conditions. So what are the things that we're going to be looking at? What we don't want to see is we don't want to see the big rise in energy prices turn into generalized inflation and then we don't want that to become persistent inflation. So how do we assess generalized? I mean right now we're seeing very limited evidence of pass through of higher energy prices to other goods and services. Obviously you can see some effects. You're seeing surcharges on airlines for example but broadly you're not seeing much pass through. How do we assess that? Well, core inflation which strips out the increase in energy prices has actually ticked down. If you look at the proportion of CPI components that are rising faster than 3%, it's close to its historical average. So far there's very limited evidence. But if we started to see more evidence that higher energy prices were passing through to other goods and services, that would certainly get our attention, that would be a source of concern. And then yes, the other thing you look for is persistence and there, things like looking at inflation expectations. Naturally with higher inflation, near-term inflation expectations have gone up. Inflation has gone up. So, of course, near-term inflation expectations have gone up. So far, we're seeing longer-term, medium-term inflation expectations are remaining well anchored, but if you started to see those drifting up, that would be a sign that inflation is becoming entrenched and the persistence is likely to go up. So, those are really the things we're watching for. It's less about the timeline, it's more about the conditions.
Okay, let's go to Paul Vieira from the Wall Street Journal, please.
Good morning, Governor. US inflation rose past 4% according to data released this morning. Why do you expect inflation to be more muted here at around 3% in the coming months? Is it because the economy is that much weaker and there's more slack or spare capacity than originally believed?
Well, that's certainly part of it. I think just to back up for a minute, part of it is that we started with 2% inflation. I mean inflation until the war in the Middle East was running close to 2% for more than roughly a year and a half. So we had inflation back to target. It has moved up but it started lower. So it's still lower than the United States. There are some other factors pushing inflation up in the US. There's no question US tariffs have boosted US inflation. That effect is probably going to start to wane unless they take new trade actions. And as you mentioned, yes, the Canadian economy is soft. It's weak. And that tends to put a downward pressure on prices generally. We have not seen any evidence yet of broad-based pass through of higher energy prices to other goods and services.
All right. Next on the list I have Kevin Carmichael from the Logic, please.
Good morning. I'd like to try to get you to say a little bit more about what the GDP miss has done to the way you're thinking about the economy now and going forward. I mean that was quite a big miss. Does that alter your estimate of slack in the economy and therefore should we assume the normalization phase is going to be longer than we might have thought a few months ago?
Well, I'll dig in a little bit on the GDP number in a minute but I mean big picture, not a great deal really has changed since our last decision. The war in the Middle East is still ongoing. Uncertainty about US trade policy remains. The review of CUSMA is ongoing and the data overall has not, there have not been big surprises. Yes, first quarter GDP was quite a bit weaker than we thought. But if you look under the hood, consumption grew 1.4%. You're still seeing consumer spending expanding. The miss was largely because there was an unexpected pullback in government spending. It can be difficult translating, government spending can be choppy one quarter to the next. We don't think there's any sort of ongoing shift in government spending. The government have announced their plans. We built those plans into our projection. Figuring out exactly how that plays out quarter to quarter is difficult. When you look at Q1, consumption was fairly healthy. Housing certainly declined. Business investment was soft. And then trade and inventories were largely a wash that gave you a very slightly negative quarter. We do think growth will resume in the second quarter. We expect to see continued expansion of consumer spending. We think there'll be a little more stability in the housing market. So we won't be subtracting from growth. So we do expect growth to resume. And if you look at the labor market month to month there's been a lot of volatility in employment. Last month was up strongly. If you look over the last 6 months, basically employment is roughly unchanged. The unemployment rate's been fluctuating in a range of 6 and a half to 7%. So, that hasn't really changed since last time.
Okay, we'll work our way across the room here now. Let's go to Craig Lord from the Canadian Press, please.
Good morning, Governors. Thank you for taking our questions. I appreciate the details of the analysis of the Q1 GDP figures there. But given the conversations for the past 10 days, I do have to ask, do you believe Canada's in a recession right now?
Look, the short answer to that question is, based on the data we've seen to date, the economy is weak, but it is not clearly in recession. So, let me just unpack that a bit for you. If you look at how the economy has evolved over the last year, GDP is roughly flat over the last 12 months. If you look at the labor market, it's up a little bit over the last 12 months, essentially flat over the last 6 months as I mentioned. There's been a lot of volatility month to month, quarter to quarter but when you look through the bumps, the economy hasn't really grown in the last year but it hasn't shrunk either. Economists typically define a recession as a significant broad-based decline in economic activity that lasts for more than one quarter. And if you look at the data we've got, based on that definition, the economy is weak, but it's not clearly in recession. If you look at the first quarter, it was just barely negative after the decline in the fourth quarter of last year. If you look across industries, what you see is that in the first quarter, more than half of industries actually grew expanded on a year-over-year basis. And as I mentioned, the unemployment rate's been relatively stable in the 6 and a half to 7% range. So, so far we have not seen a significant broad-based decline in economic activity. So, recession is not the word I would use. I would describe the economy as weak. It hasn't grown really in the last year. There's excess supply in the economy. There's slack in the labor market. We're certainly assessing that closely and as we indicated, we're prepared to respond as needed.
All right. I'll call on Greg Quinn from Market News, please.
Good morning. In the last decision, there was a reference to being able to keep the policy rate about where it was, if assumptions on oil prices and trade were met. I didn't see anything so explicit in this statement. Are you trying to tell us that it's becoming unlikely that the economy can get through this awkward phase on its own without some kind of change in monetary policy?
No, I mean we were continuing to balance both risks we've described. The oil risk is one risk. If we see oil prices increase further, if we see them sustained at a very high rate, and most importantly, as the Senior Deputy Governor just described, if we see that start to feed into broader-based price increases, that's a risk we'll need to react to. On the other hand, we still have this trade uncertainty overhang in the economy that could weigh on growth. We could get further trade action. We could get further deterioration from the sense of uncertainty we have. That's a risk we'd have to react to as well. What we're telling you today is we see those risks continue to be about where we saw them last time. The economy continues to be about where we thought it was last time, which means we've got the rate where we think it needs to be right now. We've got a forecast in a few more weeks and we'll be taking all the data in and see where we're at then.
All right. Next, I'll go to Mark Rendle from the Globe and Mail, please.
So, we have the upcoming review of the CUSMA USMCA. It seems like all three countries have said at this point they don't expect anything to be finalized on July 1. So, we could be in a period of kind of extended uncertainty about the trade relationship. How are you guys thinking about that? Is that period of an extended uncertainty kind of the downside risk you point to here as a potential reason to cut rates? What could we look like if we don't get any kind of certainty in the coming month or two?
