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Remarks by Mr Lawrence Schembri, Deputy Governor of the Bank of Canada, at the Halifax Regional Chamber of Commerce, Halifax, Nova Scotia, 5 September 2019.
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Remarks by Lawrence Schembri Deputy Governor of the Bank of Canada Halifax Regional Chamber of Commerce September 5, 2019 Halifax, Nova Scotia Economic Progress Report: Inflation in Canada—Well Behaved and Well Controlled Introduction Thank you for inviting me to speak with you today. The Bank of Canada’s mandate is to promote Canada’s economic and financial welfare. We fulfill this mandate in a number of ways, but we are probably best known for conducting monetary policy. We set our key policy interest rate with a goal of keeping inflation low, stable and predictable because that is the best way to promote sustained growth in employment and living standards. Eight times a year, my colleagues and I on the Bank’s Governing Council announce the setting for our policy interest rate. As you will likely have heard, we announced yesterday that we left our policy rate unchanged at 1.75 percent. Today, I would like to give you a sense of the thinking that led to our decision. I will also say a few words about the inflation process in the Canadian economy. To better understand how the Bank made its decision yesterday, you should know that four of our eight annual decisions are based on a projection for the Canadian and global economies produced by Bank staff.1 On those four dates, we use that projection as a basis for the forecast in the Monetary Policy Report that we publish with the announcement. On the other four dates, we base our decision largely on how the Canadian and global economies have evolved relative to the previous forecast. Yesterday’s announcement was one of the latter group. Before making our decision, we looked closely at how the economic data have been unfolding since the announcement in July. So, let us take a look at our last forecast and review what has happened over the past eight weeks. 1 You can find a detailed description of the decision-making-process on the Bank’s website. I would like to thank Patrick Sabourin for his help in preparing this speech. Not for publication before September 5, 2019 11:45 Eastern Time The July forecast Our July forecast painted a mixed picture. The outlook for the global economy was clearly weakening. At the same time, Canada’s economic rebound from a soft patch around the end of last year was stronger than we had expected. Globally, the big issue in July was the ongoing trade war between the United States and China. Rising tariffs and the related uncertainty about global trade policy were taking more of a toll on both trade and business investment than we had previously thought, causing commodity prices to fall. Meanwhile, we saw that growth in the US economy was slowing to a sustainable pace, as we had expected. Another global highlight was that many other central banks had either lowered their own policy rates to stimulate their economies or said they were prepared to do so, if necessary. These moves, along with the deteriorating global outlook, led to lower bond yields and borrowing costs in many economies, including here in Canada. Looking at all of these factors, we forecast in July that the global economy would be weaker, but there would not be a US or global recession. In contrast to the weakening global outlook, however, most indicators for the Canadian economy in July were positive. Growth had rebounded more strongly than we had earlier forecast, driven by factors that were not likely to last—for example, a surge in oil production. Still, a strong job market and rising wages were supporting growth in Canadian household consumption. This growth, along with the lower interest rates I just mentioned, led us to anticipate that the housing market would stabilize this year and would finish working through the dampening effects of various local housing measures, primarily in the greater Vancouver and Toronto areas, and the B-20 mortgage stress-test rules. All told, we projected that the economy would grow at a pace of 2.3 percent in the second quarter and that inflation would be close to our 2 percent target. Global trade tensions continued to cloud the outlook and represented the biggest risk to our forecast. That is a quick review of how we saw things in July. Now let’s look at how things have evolved since then. Recent developments Economies outside Canada The first thing to note is that the main themes from July have not changed. We still see ongoing weakness in the global economy and resilience in the Canadian economy. However, a few key aspects of the storyline have changed. Internationally, the US–China trade war has gotten worse. Escalating tariffs and uncertainty are reducing global trade and investment by more than we had forecast. The volume of global trade has now shrunk for a third straight quarter. Growth in major economies is slowing as manufacturing output and business investment weaken. Specifically, recent data point to slower momentum than anticipated in both China and the euro area, with the risk of a recession rising in Germany. The US -3economy continues to moderate but remains solid, supported by consumer and government spending. Financial markets have continued to react to this weaker outlook, and more central banks have taken measures to stimulate their economies. Bond yields are lower, and the yield curve is inverted in many countries. An inverted yield curve means that short-term interest rates are higher than long-term rates. This is the opposite of how the yield curve normally looks because longer-term lending is usually considered riskier. Historically, an inverted yield curve has been viewed as a sign of a future recession, especially in the United States. Today, with interest rates so low to begin with, an inverted curve is more likely a sign that investors foresee weaker long-term growth. The Canadian economy In contrast to the global economy, Canadian economic data since July have surprised on the upside. Last week, we received the national accounts report for the second quarter. It showed the economy grew at a pace of 3.7 percent, much stronger than we had forecast. Among the highlights from the report was labour income, which grew by 7 percent, reflecting continuing growth in employment and hours worked and a notable pickup in wages. That rise in income, along with the lower interest rates I mentioned earlier, helped support unexpected strength in housing. In fact, most people renewing a five-year fixed-rate mortgage today are paying a lower interest rate than they did five years ago. Housing is once again contributing to growth, with resales and starts catching up to underlying demand. High levels of household debt remain the main risk to Canadian financial stability, but with tighter mortgage rules in place, the quality of the stock of household debt should continue to improve. However, consumption was surprisingly soft in the quarter, particularly given the increase in labour income. And the national accounts data suggest that some of the economy’s strength will be temporary. Exports were very strong, but much of that came from a sharp rebound in shipments of crude oil and transportation equipment. Imports were surprisingly weak, and companies are still carrying high levels of inventories. Business investment contracted sharply after a strong first quarter, likely reflecting, in part, the impact of the escalating trade war. The stronger second-quarter growth means that the economy was operating close to its productive capacity, or potential—a concept I will explain in a minute. And inflation has been very close to our 2 percent target. Inflation and the Phillips curve Now, let me spend a few minutes on the relationship between inflation and economic growth. This issue has been in the news lately because inflation rates in the United States, the euro area and Japan have stayed low, even though their economies had been strengthening, at least until recently. In particular, there has been much -4debate about the continued existence of what economists call the Phillips curve. This is the idea that there is a close link between economic growth and inflationary pressures.2 Because of the persistently low inflation experienced in several major countries, some observers have gone so far as to declare the Phillips curve dead. Here at home, though, our experience has been different. As the title of my speech says, inflation in Canada has been well behaved. Before looking at the evidence that supports this claim, I would like to explain why this relationship is an important part of the Bank of Canada’s approach to conducting monetary policy. As I said at the beginning of this speech, the primary objective of the Bank’s monetary policy is to achieve low, stable and predictable inflation. Like many other central banks that also practise inflation targeting, we adjust our policy interest rate to try to bring overall demand and supply into balance so that all of our productive resources are fully utilized. At this point, our labour force would be fully employed, and the economy overall would be using all of its productive capacity.3 This is what we mean when we say the economy is operating at its potential output.4 The concept of potential output is important because inflation should be close to our 2 percent target when the economy is operating at that level. When there is a difference between the economy’s potential output and what is actually being produced, we say there is an output gap. If we project that strong growth is likely to push the economy above potential—creating a positive output gap and causing inflation to increase above our target—we may raise interest rates to cool demand growth.5 And the reverse is true if weak growth is set to pull the economy below its potential, thus creating a negative output gap. So, by adjusting our policy interest rate, we influence demand for output and employment, aiming to close the output gap and achieve our inflation target. To be sure, other factors beyond the output gap can affect inflation, measured by the consumer price index (CPI). Exchange-rate movements can affect inflation because they directly affect the price of imported goods and services consumed by households. And, because Statistics Canada calculates CPI inflation using 2 There are a few different ways to define the Phillips curve. In this speech, I am talking about the relationship between inflation and the economy’s output gap, not the relationship between inflation or wage growth and unemployment (which is related to the size of the output gap). 3 In practice, the concept of full employment does not imply that the unemployment rate would be zero because some workers are always transitioning between jobs for various reasons. 4 For more on this topic, see L. Schembri, “The (Mostly) Long and Short of Potential Output” (remarks to the Ottawa Economics Association and CFA Society Ottawa, Ottawa, Ontario, May 16, 2018). 5 Monetary policy is transmitted both through its effect on interest rates and its effect on the exchange rate. So, for example, a rise in the policy interest rate tends to appreciate the value of the Canadian dollar, making our exports more expensive and imports less expensive. This reduces the demand for Canadian-produced goods and services. -5prices for a basket of goods and services that a typical family buys, swings in specific prices—such as for gasoline—can have a large impact.6 So, to help us see the underlying trend of inflation, we rely on a number of measures of core inflation that filter out most of the impact of these shocks. As a result, these core measures are less volatile than total CPI inflation and do a better job of capturing persistent, underlying movements in prices. In 2016, Bank staff evaluated various core measures in detail, which led us to announce that we would pay particular attention to three of them.7 Chart 1: Range of core inflation measures and the output gap 2.0 % % 2.5 1.0 0.0 2.0 -1.0 1.5 -2.0 1.0 -3.0 0.5 -4.0 -5.0 0.0 Range of core inflation measures (right scale) Output gap at t-4 (left scale) Last observation: 2019Q2 The behaviour of these three core measures in recent years offers some compelling evidence for the relevance of the Phillips curve in Canada.8 Think back to 2014–15, when the price of oil plunged, growth slowed, and the economy slipped below its potential output. Over that period, core inflation was well below 2 percent. As the Canadian economy adjusted to the oil price shock, the output gap began to close rapidly in 2017. By the second half of that year, core inflation moved back up toward our target, responding to the closing of the gap with a bit of a lag. Since then, our preferred measures of core inflation have been hovering around 2 percent. This is consistent with our estimate that the economy has been operating close to potential output throughout most of that period. 6 Of course, no household is average. You might buy a different set of goods and services every month. However, CPI is the best indicator of inflationary pressure available to us. 7 The three measures are called CPI-trim, CPI-median and CPI-common. You can find more information in Renewal of the Inflation-Control Target Background Information—October 2016 8 The question remains why the Phillips curve relationship between inflation and the output gap seems to hold more strongly in Canada than in other major jurisdictions, especially since the global financial crisis. The wide range of possible explanations include, for example, better anchored inflation expectations in Canada or less underlying slack in the labour market because the Great Recession that followed was less severe in Canada. -6Today, the Bank is publishing an updated evaluation of our core inflation measures that shows that they continue to perform well.9 They are less volatile than CPI inflation and strongly linked to the output gap, with a lag. This evidence of a close correlation between underlying inflation and the output gap bolsters our confidence in our inflation projections and in our framework for conducting monetary policy. The latest data show that total inflation remained right at the 2 percent target in July. This is a bit stronger than we expected, mainly because of temporary factors, including higher prices for air travel, mobile phones and some food items. Our core inflation measures were also around 2 percent in July, which is consistent with the idea that the economy’s output gap is essentially closed. Our decision So, with all that as background, let me conclude by talking about the Bank’s decision yesterday. My colleagues and I began our discussions by recognizing that the data indicate the Canadian economy is operating close to full potential, the unemployment rate is near historic lows and inflation—our primary responsibility—is right on target. The economy has clearly gotten past its earlier soft patch, the labour market has been strong and housing markets have begun to rebound. Although household debt levels remain high, mortgage underwriting rules are helping to contain financial vulnerabilities. This solid starting point means the economy has a welcome degree of resilience to possible negative economic developments. That said, we agreed that the data show some areas of concern. Among these is the weakness in consumption. It is difficult to square the softness in consumption with the strength in labour income. And, of course, we are concerned about the drop in business investment, which is likely linked to ongoing trade war and related uncertainty. So, we continue to expect that economic activity will slow in the second half of the year. Given Canada’s reliance on international trade, we agreed that the trade war remains our primary concern and the biggest risk to our forecast. Trade policy uncertainty has been weighing on business investment and exports for a couple of years now. And things could certainly get worse internationally, which would deliver a complex shock to our economy affecting both supply and demand. In this uncertain environment, central banks have been conducting monetary policy appropriate to their own circumstances and outlooks. This has contributed to lower bond market yields and reduced borrowing costs in Canada. The Bank of Canada will continue to conduct monetary policy appropriate to our own circumstances. We will continue to ground our decisions in our policy framework, 9 See H. Lao and C. Steyn, “A Comprehensive Evaluation of Measures of Core Inflation for Canada: An Update.” Bank of Canada Staff Discussion Paper No. 2019-9. Note that these measures do not perfectly filter any relative price shocks. For example, the auto component of the CPI is idiosyncratic and relatively volatile; thus, one-time changes in auto prices can affect core inflation measures. It has a larger effect on CPI-median and CPI-trim than on CPI-common. -7setting interest rates to achieve our inflation target, mindful of the implications for financial vulnerabilities. Our current policy setting of 1.75 percent, which is 50 basis points below the US policy rate, continues to support the economy. To sum up, as I said earlier, Canada’s economy is operating close to potential and inflation is on target. However, escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies. In this context, the current degree of monetary policy stimulus remains appropriate. As the Bank works to update its projection in light of incoming data, Governing Council will pay particular attention to global developments and their impact on the outlook for Canadian growth and inflation. I hope I have been able to shed some light on the Bank’s rate-setting process. I thank you for your attention and look forward to answering your questions.
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Opening statement by Mr Stephen S Poloz, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 30 October 2019.
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Stephen S Poloz: Release of the Monetary Policy Report Opening statement by Mr Stephen S Poloz, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 30 October 2019. * * * Good morning. Senior Deputy Governor Wilkins and I are pleased to be here to answer your questions about today’s interest rate announcement and our Monetary Policy Report (MPR). Before turning to your questions, let me first offer some insight into Governing Council’s deliberations. Not surprisingly, the worsening global situation was the primary issue. Economic forecasts have been marked down further in most countries, largely as a consequence of the escalation of trade actions and uncertainty around what may be next. Heightened uncertainty about future trade policies is directly reducing business investment, and there is a risk that this will spread to households as well. These consequences can be buffered through easier monetary policy, and many central banks have recently eased in response. However, we need to remember that tariffs and trade restrictions will work over time to permanently reduce potential output everywhere, while raising the prices of consumer goods—a stagflationary scenario. Monetary policy can only do so much about these elements of the shock. Canada is not immune to these global developments. In fact, Canada was one of the first countries to feel the effects of trade policy uncertainty, since NAFTA was the first target of the Trump administration. Indeed, this uncertainty has been weighing on investment in Canada for the past three years. These were important headwinds preventing Canadian interest rates from rising by as much as US rates did during 2017–18. Nevertheless, as other economies feel a growing impact from the trade war, there are second-round impacts on Canada through weaker exports and lower commodity prices. In today’s updated projections, we are forecasting both exports and business investment to contract in the second half of this year and to recover only moderately in the next two years. We can see a wide range of indicators pointing to these effects—in manufacturing, mining and rail transportation—in our Business Outlook Survey and in the quarterly reports of bellwether global companies. While we have had these secondary effects in our forecast for some time, and increased them in our latest projection, these are mostly judgment-based, and the situation could worsen. Accordingly, we present a deeper analysis of this downside risk in today’s MPR, in Box 3. Let me just note that the biggest effect for Canada of a more negative global growth scenario would be a steeper drop in commodity prices and, as in 2015, a significant depreciation of the Canadian dollar. In contrast to these adverse global developments, the Canadian economy is demonstrating resilience overall. The economy continues to create new jobs at a solid pace, the unemployment rate is near an all-time low, many companies are reporting an acute shortage of skilled workers, and wage growth is picking up noticeably in the past six months or so. The housing sector is clearly on the rebound, having digested the various housing policy changes put into place during 2016–18, and is still being fuelled by relatively high rates of immigration. Consumption spending has held up relatively well on average, supported by the solid labour market and low interest rates, even as the savings rate has been edging higher. At the same time, energy-producing regions continue to struggle, as the full adjustment to the decline in oil prices back in 2015 is not yet complete, and transportation constraints are making the situation worse. You may recall that back in 2015 we said that the full adjustment would take up to five years—that even with lower interest rates and a lower dollar, as well as fiscal stimulus, 1/2 BIS central bankers' speeches the adjustment to such a large shock takes a long time. It is painful for individuals, as it involves extended layoffs and possibly interprovincial migration, which is costly for all concerned. All this adds up to a complex outlook for Canada, with considerable variation across regions and sectors. The strong labour market points to sources of growth such as information technology and other professional services, tourism, education, health care and financial services. Some of this growth is being offset by negative effects coming through business investment and exports, particularly in manufacturing and the resource sector. On the whole, however, it appears that our economy is still operating close to capacity but probably with a modest amount of excess supply. Governing Council agreed that, all things considered, this excess supply is probably not pervasive. Furthermore, our situation differs from many other countries in that inflation is at our 2 percent target today and projected to remain very close to target, despite the presence of modest excess supply. However, we acknowledge the downside risks, as set out in our alternative scenario in Box 3. Governing Council also devoted some time to a discussion of the evolution of financial vulnerabilities in Canada. We have been encouraged by developments since the enhancement of the mortgage stress test, as there has been a significant decline in new mortgages above 450 percent of disposable income. Further, we have not seen evidence of froth in major housing markets for some time now. However, the recent strength in many housing markets across the country is a reminder that we will be carrying high levels of debt for a long time, despite a constructive evolution of vulnerabilities. It is with this context in mind that Governing Council considered whether the downside risks to the Canadian economy were sufficient at this time to warrant a more accommodative monetary policy as a form of insurance against those risks, and we concluded that they were not. In this setting, we discussed whether such insurance may come at a cost, in the form of higher financial vulnerabilities and possible consequences for the economy and inflation in the future. We agreed that the new mortgage rules in place limit this cost, but the situation will require continuous monitoring. Moreover, the fact that inflation has been on target and is projected to remain near target means that we can weigh the upside and downside risks to inflation more symmetrically. Governing Council is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist. In considering the appropriate path for monetary policy, we will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment. In this context, we will pay close attention to the sources of resilience in the Canadian economy, notably consumer spending and housing activity. We will also be watching for any changes to fiscal policy at the federal level now that the election is behind us. With that, Senior Deputy Governor Wilkins and I will now be happy to take your questions. 2/2 BIS central bankers' speeches
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Remarks by Mr Stephen S Poloz, Governor of the Bank of Canada, to the Empire Club of Canada, Toronto, Ontario, 12 December 2019.
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Stephen S Poloz: Big issues ahead - the Bank of Canada’s 2020 vision Remarks by Mr Stephen S Poloz, Governor of the Bank of Canada, to the Empire Club of Canada, Toronto, Ontario, 12 December 2019. * * * Introduction It has become a tradition for me to give a speech at the end of the year about the major issues affecting the Canadian economy. I will only get to say this once, so I hope you will permit me… Today, I want to focus on the Bank’s 2020 vision. I want to walk you through some of the major forces acting on the economy and indicate what the Bank will be doing about them. I touched on some of these issues back in September at the Changing Fortunes Round Table at Spruce Meadows, in Calgary. Since then, I’ve been working to formalize those ideas in a paper, which the Bank is publishing today. In stepping back from the many short-term issues we have on our plate, I can avoid covering the same ground as in last week’s speech by Deputy Governor Tim Lane. Tim discussed the considerations behind our latest interest rate announcement and offered an excellent historical analysis to put it all in context. Big issues ahead The basic story of the global economy since the 2008 global financial crisis has been one of disappointing economic growth—serial disappointment, we came to call it. Yes, it proved very difficult to recover from the Great Recession that followed the crisis. But other long-term, structural factors have also been at work. Two basic factors drive trend economic growth: population growth and productivity growth. Global population growth peaked in the mid-1960s and has been slowing ever since. This puts a natural brake on global economic growth. And recent productivity gains have not been large enough to offset the impact of this demographic slowdown. There is of course potential for higher productivity growth in the future. I am referring to what has been called the fourth industrial revolution—the increasing use of artificial intelligence (AI), machine learning and big data throughout our economy. However, judging from past experience, these productivity gains could be slow to arrive. Computers went into widespread use during the 1980s, but a surge in productivity growth did not emerge until the period from 1995 to 2005. I delivered a paper about this a few weeks ago at a conference hosted by the Federal Reserve Bank of San Francisco. Besides, the near-term risks around productivity growth are tilted to the downside. This is because trade conflicts, and the emergence of nationalist or populist policies more generally, threaten to reverse some of the prior productivity gains made through globalization. Tariffs on imports are forcing companies to dismantle supply chains and create new ones that are likely to be less efficient. At the same time, uncertainty about the future of trade policies and critical institutions like the World Trade Organization is having a more insidious effect—companies have cut their investment plans, which also means less potential economic growth in the future. On balance, then, it looks like the global economy is set for continued slow economic growth for mostly structural reasons. For these same reasons, this means that low interest rates are likely to persist too. 1/6 BIS central bankers' speeches To be clear, I am not making a near-term prediction about the Bank of Canada’s policy rate. I am talking about structural forces acting on the global economy and global interest rates over a period of years. In any era, interest rates fluctuate around a trend line, which is determined by structural forces, not by monetary policy. What I am saying is that in this era, it looks like interest rates are likely to fluctuate around historically low levels. Now, one possible consequence of persistently low interest rates is that household indebtedness may continue to increase relative to the overall economy. Government indebtedness might also continue to rise as governments try to kick-start sluggish economies. The world stock of debt of all types is now more than three times global gross domestic product (GDP). Experience shows that high debt levels can amplify the impact of a shock on the economy, such as a rise in unemployment. This is because some borrowers could default on their debts, leading financial institutions to lend less, or even fail. Meanwhile, governments with a high debt load may be less able to stimulate a faltering economy. In Canada, household indebtedness is our most important financial vulnerability. The latest data show household debt is 177 percent of disposable income, a bit below last year’s record high, but still elevated. For some countries it is the stock of government debt that causes the most concern. US government debt is more than 100 percent of GDP and rising quickly. In Japan, it is more than 200 percent. In comparison, Canada’s total government debt is close to 90 percent of GDP, of which federal debt is about 30 percent. Policy-makers have taken the lessons learned from the 2008 global financial crisis to heart. They have imposed new rules on banks around capital and liquidity, and the global financial system is much safer today as a result. Here in Canada, authorities have also imposed stricter guidelines around mortgage lending to help contain financial vulnerabilities. Thanks to these changes, even if household indebtedness rises further, its sustainability is gradually improving. In contrast, the lessons of the Great Inflation of the 1970s seem to be fading from our collective memory. Perhaps the recent tendency for inflation to run below target in many countries has fostered a degree of complacency. More likely, inflation risk is being overwhelmed by deep structural forces limiting economic growth, keeping even long-term interest rates very low. The risk of a surprise outbreak in global inflation is low. But it seems to me that the combination of elevated household and government indebtedness and populist politics holds inflationary potential for some countries. Some leaders are even actively questioning both the value of inflation targets and the need for central banks to be politically independent. Highly indebted households might be inclined to vote for politicians proposing to promote higher inflation. The fact is, the Great Inflation of the 1970s resulted in a substantial transfer of wealth from savers to borrowers, including to governments. Fortunately, we have an institutional framework in Canada that addresses this risk directly. The Bank of Canada and the federal government agree formally and transparently every five years on the goals of monetary policy. This gives our inflation targets democratic legitimacy, while providing the Bank the operational independence to pursue them. Importantly, Canada also maintains a flexible exchange rate, which is essential to maintaining low and stable inflation domestically, regardless of developments abroad. Our 2020 vision Given this backdrop, a veritable smorgasbord of work will be going on at the Bank in 2020. But let me focus on four areas. 2/6 BIS central bankers' speeches Inflation-target renewal First is the inflation-targeting agreement I just mentioned. The next renewal of the agreement is scheduled for 2021. The Bank uses the time between renewals to take stock of experience with the framework and to look seriously at any improvements we can make to our monetary policy. There is a section on our website where you can follow the current renewal process. Here we are posting new research as it is completed and providing information on workshops and conferences that are dedicated to the topic. In this renewal cycle we are going back to basics, comparing alternative targeting frameworks—such as inflation-averaging strategies and nominalGDP targeting—with inflation targeting. We are also researching the various tools we have at our disposal and how our policy interacts with other public policies. Moreover, we are expanding our efforts to gather outside views on these issues. We have been talking to a wide range of stakeholder groups, including business and labour organizations, academics and other central banks. In 2020, we plan to hold a number of round tables with civil society stakeholders to deepen our understanding of the economy across sectors and regions. As an accountable public institution, we are eager to hear your views. That is why in 2020, we will conduct an open, public consultation process on our website to gather input from Canadians across the country. We will summarize these public and stakeholder consultations, as well as new research on the subject, on our website in late 2020. We will then make a recommendation to the government and hold discussions that will lead to the next formal agreement on the framework in 2021. Monetary policy and financial stability Another important area for the Bank next year will be to continue to embed financial stability linkages in our monetary policy framework. Let me illustrate with an example. Consider a situation where we updated our economic forecast and concluded that inflation was likely to move below our target. Our models would suggest that we should lower interest rates to stimulate economic growth and bring projected inflation back to target, usually over six to eight quarters. Now consider the same situation, but with high levels of financial vulnerabilities. Stronger economic growth from lower interest rates would make it easier for everyone to service their debt. But lower interest rates would also encourage a buildup of more debt, making economic growth more vulnerable to a future shock to the economy. In turn, this could make it harder to achieve the inflation target sometime in the future. Accordingly, bringing financial vulnerabilities into the equation means introducing a degree of flexibility into the inflation-targeting process. The horizon over which we would work to get inflation back to target depends on the severity of financial vulnerabilities. Of course, to the extent that macroprudential policies are in place to keep financial vulnerabilities in check, policy-makers can put less weight on those vulnerabilities. Over the past couple of years, Bank staff have developed a new framework to help us objectively evaluate this trade-off, called a growth-at-risk model. It combines the risks to economic growth and inflation coming from both the macroeconomy and financial vulnerabilities in any given setting. It requires a lot of judgment to use, but this framework is helping to bring more rigour to our deliberations and to our communications. The growth-at-risk framework we are using today is a prototype, based on international experience with financial vulnerabilities and on a very simple macroeconomic model. Work to enhance the model and incorporate more Canadian detail into the financial vulnerabilities is well 3/6 BIS central bankers' speeches underway and these enhancements should be deployed in 2020. Meanwhile, we will continue to refine our core economic forecasting models to enrich the linkages between the financial sector and the economy. We have also begun to scope out a work program on the next-generation economic model to replace our core structural projection model, ToTEM (Terms-of-Trade Economic Model). Judging from past experience, this effort could take up to 5 to 10 years. The impact of digitalization A third area of focus for the Bank in 2020 will be to assess the economic and financial impact of digitalization. As I mentioned earlier, we can see evidence of the spread of AI all around us. Its effects on the economy may be profound. My main message in San Francisco was that the fourth industrial revolution is likely to follow the pattern of the previous three. We can expect a significant disruption of workers in many industries. We can also expect the new technologies to lead to stronger growth in sectors where they are deployed. And the higher productivity that will result will increase the economy’s potential to grow. This will create new job opportunities widely throughout the economy, while also causing inflation to fall short of what our models would predict. So far, we have not seen signs of higher productivity in the economic data. Once again, the experience of previous industrial revolutions can be instructive. In the last few years of the 1990s and early 2000s, we now know that productivity rose quickly. But the economic statistics of the time did not capture this until long after the fact because it is difficult to measure developments in new economic sectors. It is certainly possible that the same dynamics will emerge in the near future. In 2020, the Bank will be working hard on new ways to detect and determine the economic impact of the fourth industrial revolution. One area that shows promise is to use AI to analyze big data for keywords and to build synthetic indicators of technological change. Michelle Alexopoulos from the University of Toronto, a winner of a Bank of Canada Fellowship Award, is doing innovative work in this area. Of course, we will also continue to talk directly to Canadian companies to gather intelligence on the spread of AI. The future of money Finally, there is the central banker’s favourite subject, money. Technology is affecting how Canadians make payments, so it will affect money too. To start with, Payments Canada is working with the Bank and with the major financial institutions to modernize our core payments systems. This will allow for wider access and more innovation. The first stage is to replace the wholesale system, now over 20 years old, which manages transfers between major financial institutions and through which the Bank of Canada operates. Most of the work on the new wholesale system should be completed in 2020. Now, the wholesale system handles most of the dollar value of payments. But there are thousands of times more retail transactions on any given day. So, modernizing the retail payments system is a top priority. Two to three years from now, you will be able to execute transactions between yourselves in real time—a major advance over today’s lags. These prospects have the Bank thinking hard about the future of money, especially cash. A decade ago, more than half of all transactions in Canada were done with cash. Today, that number has dropped to about one-third. It is more and more common to see people tap a card or take out their phone to make a payment. Canadians are also doing more business online, and more than half of us have sent money with PayPal or Interac e-transfer. Certain businesses have begun to accept only electronic payments. 4/6 BIS central bankers' speeches I believe that central bank money—the bank notes you have in your pocket—will always provide an important public good: an individual’s sovereign right to make payments with an instrument that is universally accepted and final. A private digital currency cannot deliver that, regardless of how widespread its use may become. The other nice thing about cash is that it will still work even during power blackouts or cyber attacks. As a consequence, bank notes will probably always be around to some degree, if only as a contingency for unusual events. All things considered, then, it is an open question whether the Bank of Canada would ever see the need to issue a currency in digital form as a substitute for cash. Nevertheless, the world of money is evolving very rapidly, so we need to develop plans to deal with whatever contingency arises. We will have more to say about this early in 2020. Given this context, the Bank needs to think about other emerging payment technologies. These include cryptoassets, such as Bitcoin, as well as stablecoins, such as Libra. Because these are potentially global, they are attracting attention from central banks and other regulatory authorities. Such innovations will bring new risks to the financial system. We need to understand these risks and apply appropriate regulation. One area of particular interest to central banks is cross-border transactions. As usual, the Bank will be working on many more issues in 2020 than I have been able to summarize here. Before I conclude, though, let me mention one topic that has garnered a lot of interest lately: Modern Monetary Theory. Essentially, the idea is that governments that can issue their own currency can never go bankrupt. Accordingly, rather than borrowing from the public by issuing bonds, governments should spend as much newly issued money as needed to keep the economy growing and maintain stable inflation. This sounds like Modern Monetary Theory is offering a free lunch, and most of us know there is no such thing. First, the idea is not monetary. Government spending is a fiscal decision, not one for the central bank. Second, the idea is not modern. It has been tried many times in the past, and the record is not pretty. For example, in the late 1960s the US government was running large fiscal deficits to finance the war in Vietnam. This led to very rapid money creation. The result was a breakdown of the Bretton Woods system of fixed exchange rates and a surge in global inflation spanning the 1970s. There are far better means of avoiding slow growth and deflation— promoting innovation, providing infrastructure, removing impediments to international and intranational trade, eliminating red tape—just to cite a few obvious examples. With stronger trend growth, fiscal and monetary policy can focus on buffering economic fluctuations. Conclusion It is time for me to conclude. We can see the broad forces of low interest rates, rising debt and technological change working in combination to stress households, companies and governments. The impact of these forces will keep the Bank of Canada busy in 2020 and beyond. The precise way these forces will unfold is highly uncertain. All of us—consumers, business people, policy-makers—will have to deal with these sources of uncertainty over the long term. That sounds challenging, and I will not pretend otherwise. But when you consider the broad sweep of history, you must admit that Canadians have always had to deal with powerful global forces and uncertainty, some more potent than the ones we face today. Yet here we are, in a thriving modern economy. That is not to say things are perfect. Far from it—sectors and regions of our country continue to struggle, and policy-makers have lots of work to do. Still, consider what we have been through 5/6 BIS central bankers' speeches over the past decade—the global financial crisis, the subsequent slow recovery, the collapse of oil prices, and political uncertainty abroad. Despite all of that, Canada’s economy is operating close to capacity, inflation is on target, labour force participation is up across almost all age groups, and the jobless rate is near historic lows. In my experience, one should never underestimate the ability of Canadians to face and overcome challenges, using the same tools they always have—hard work and ingenuity. I wish you the very best for 2020. 6/6 BIS central bankers' speeches
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Remarks by Mr Timothy Lane, Deputy Governor of the Bank of Canada, at the Ottawa Board of Trade, Ottawa, Ontario, 5 December 2019.
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Remarks by Timothy Lane Deputy Governor of the Bank of Canada Ottawa Board of Trade December 5, 2019 Ottawa, Ontario Economic Progress Report: Charting Our Own Course Introduction Good morning. It is a pleasure to be here to share my thoughts about the Canadian economy and discuss the decision we announced yesterday to hold interest rates steady. I’d like to thank the Ottawa Board of Trade for the invitation. It is news to no one that we are living in unsettled times. The world economy continues to be buffeted by trade conflict, and relations between the United States and China are on a roller coaster. This enduring uncertainty has already done some damage. Global growth has suffered. Because Canada is an open economy dependent on trade, our economy has suffered as well. Commodity prices, which affect a big part of our economy, have weakened over most of the year. Business investment has been weighed down, and our exports have suffered because of softer global demand. But Canada also has notable strengths, and inflation remains on target. Our strong labour market points to sources of growth, such as computer system design and other professional services, education, health care and financial services. It is because of this strength amid the turmoil that we say Canada is resilient, although it is not immune. This resilience has helped the Bank of Canada chart its own course in monetary policy. Many people wonder why we have held our key policy rate steady over the past year while many other central banks have lowered their rates. The comparison between Canada and the United States is front of mind. In 2019, the US Federal Reserve cut its rate three times, partly as insurance against the negative effects of the global environment. In Canada, we’ve kept our policy rate unchanged since October 2018. That divergence is not as stark as it’s sometimes portrayed: when all is said and done, by this October the Bank of Canada and the Fed ended up with the same policy rate. But it is sometimes I would like to thank Brigitte Desroches and Harriet Jackson for their help in preparing this speech. Not for publication before 08:00 Eastern Time -2believed we must do whatever the Fed does because our economy is so closely tied to that of our largest trading partner. With that in mind, I’d like to take this opportunity to explain the path we’ve taken, not only in terms of yesterday’s decision but also more generally. In my remarks, I will look back on these separate paths that Canada and the United States have followed over the past several years. I will then review the current situation and explain the rationale behind our policy interest rate decision yesterday. Long and winding roads It’s now been more than a decade since the global financial crisis and the onset of the Great Recession worldwide. That makes this a good time to briefly review this history because it helps us understand where we are now. Policy interest rates in Canada and the United States have followed distinct tracks over the past 10 years, reflecting different macroeconomic forces. Chart 1: Policy rates in Canada and the United States have followed different tracks over the past 10 years a. Level of the policy rates, daily data % Canada Sources: Federal Reserve Board via Haver Analytics and Bank of Canada United States Last observation: November 29, 2019 -3b. Difference between the Canadian and US policy rates, daily data Percentage points -1 -2 Sources: Federal Reserve Board via Haver Analytics and Bank of Canada Last observation: November 29, 2019 Notably, the global financial crisis played out differently in the two countries. Going back to 2009, the recessions in Canada and the United States were about equally severe in terms of output loss, but for different reasons. The United States experienced a home-grown financial crisis in which some major financial institutions failed and many others were threatened. Canada’s financial system was comparatively sound, but exports and commodity prices collapsed. Both countries responded to their respective shocks by cutting interest rates as far as they thought possible at the time. In addition, the Fed resorted to a large suite of unconventional monetary policies. In Canada, we reinforced the low interest rate using forward guidance—what we called the “conditional commitment” to keep our policy rate at the floor for at least another year unless inflation picked up. But we went no further. In both countries—as in much of the world—fiscal policy gave a major boost to demand during the recession. After the rate cuts, Canada bounced back quickly. Exports and investment rebounded, in part reflecting higher commodity prices. The United States had a slower recovery. The Bank of Canada raised rates by 75 basis points to 1 percent in 2010. The Fed held rates near zero for more than five years. Starting in 2010, as the recovery appeared to be underway, most major economies began a course of fiscal consolidation. In Canada, the government took steps to move the federal budget toward balance. The United States implemented a policy of automatic spending cuts triggered by US budget law, known as sequestration. With the benefit of hindsight, those moves toward balanced budgets proved to be premature. The world was in for several more years of lacklustre growth. -4Chart 2: The Canadian economy bounced back faster after the Great Recession Real GDP, index: 2009Q2 = 100, quarterly data Index Canada Sources: Bureau of Economic Analysis via Haver Analytics, Statistics Canada and Bank of Canada calculations United States Last observation: 2014Q4 Competitiveness challenges facing Canadian exports also dampened business investment in the non-energy sector. As Canada’s economy continued to fall short of its potential, the Bank of Canada kept the policy rate at 1 percent. Meanwhile, the US economy turned around, and in 2013 the Fed hinted at tapering its purchase of financial assets. Between 2014 and 2016, Canada had a major setback with the collapse in the prices of oil and other commodities. We had a technical recession—two consecutive quarters of negative growth—in 2015. The Bank of Canada cushioned the blow by cutting policy rates twice, to 50 basis points. The Canadian dollar depreciated by more than 20 percent against the US dollar. That facilitated the adjustment to lower commodity prices. In addition, the federal government introduced measures, including the Child Tax Benefit, that added fiscal stimulus to the economy. In contrast, as US growth continued, the Fed began to slowly normalize policy rates. Reflecting the more favourable US economic situation, the US dollar appreciated. During this period, inflation ran below target in both countries. During 2017–18, economies worldwide expanded largely in sync. A major fiscal boost in the United States pushed that economy above potential. Canada’s economy reached close to potential, and our core inflation measures reached target and stayed there. This expansion allowed both the Bank of Canada and the Fed to raise rates toward what is viewed as a neutral range. Still, Canada remained slightly behind on the rate normalization, given the earlier setbacks to the economy. -5At this point, it is useful to note another major difference between the two economies. The US housing bubble had burst in 2007–08, but Canada’s housing market and mortgage debt continued to build in the decade after the global financial crisis. Canadians borrowed heavily, and average house prices rose to levels that were high by any metric. This was at least partly the legacy of low interest rates, in a setting where households had room to borrow and commercial banks remained very well-capitalized. These factors create vulnerabilities that could amplify any negative shock to the economy. Chart 3: Household debt as a share of income has continued to increase in Canada, in contrast to the United States, where it has fallen Index: 2000Q1 = 100, quarterly data Index 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Ratio in Canada adjusted to US concepts Sources: Federal Reserve Board via Haver Analytics, Statistics Canada and Bank of Canada calculations Ratio in the United States Last observation: 2019Q2 Between 2016 and 2018, a combination of policy measures affecting the housing market were introduced. In addition to higher interest rates, macroprudential measures—including the B-20 stress test—tightened mortgage lending. In a bid to counter speculation, provincial and municipal governments targeted taxes at non-resident investors. These measures led to moderation of the housing market in many parts of Canada and to a drop in house prices in the most overheated markets. Starting in late 2018, the Canadian economy slowed once again. The cooling housing market and adjustments in the energy sector related to transportation capacity constraints and associated curtailments weighed on growth. Weak business investment and exports in the sector contributed to the slowdown. Trade conflicts were also a headwind. As an open economy, Canada is hurt by the weaker foreign demand and lower commodity prices that come from trade conflicts. The United States is less dependent on trade but, as the conflict has escalated, has increasingly had the added drag of tariffs. Both countries—and -6indeed, the whole world—were adversely affected by the uncertainties around trade conflicts. On the monetary policy front, US inflation has been below target. The Fed has cut interest rates three times during 2019. In contrast, the Bank of Canada has not cut rates. In part, this is because inflation and its outlook remain on target, and also because our policy rate was lower to begin with. Moreover, because Canada already has high levels of household debt, lowering rates further could make those vulnerabilities worse and amplify future shocks. In sum, there is no reason for the Bank of Canada to move in step with the Fed. On the contrary, the experience of the past decade shows that Canada and the United States have followed different roads, reflecting differences in our economic conditions. Canada does share many of the same macro fundamentals as the United States. For long periods, the two economies are highly correlated, so monetary policy can be very similar in those periods. But Canada is a more open economy, with greater dependence on natural resource industries. For that reason, we are more exposed to world events, both directly through demand for our exports and indirectly through commodity prices. As a result, there have been extended periods when our monetary policies have diverged. It is also because of these differences that Canada benefits from a flexible exchange rate. Chart 4: US inflation has been below target while Canadian inflation remains close to target Year-over-year percentage change, monthly data % 3.0 2.5 2.0 1.5 1.0 0.5 Range of core inflation measures in Canada* US core personal consumption expenditure price index Total Canadian consumer price index * The measures are CPI-common, CPI-median and CPI-trim. Sources: Bureau of Economic Analysis via Haver Analytics, Statistics Canada and Bank of Canada calculations Last observation: October 2019 Where are we now? This brings us to the present. How is the economy evolving now, and what does it mean for the outlook? -7Globally, economic growth has slowed significantly over the course of this year, and it appears to be levelling off. The Bank still expects that it will edge higher again in the period ahead. The global slowdown partly reflects the fact that the US economy was boosted by fiscal stimulus that has since been winding down. It also reflects a rebalancing of the Chinese economy as authorities address high levels of corporate and municipal debt. Against this backdrop, the global trade conflict has had a meaningful negative effect on world trade and on business confidence and investment. The damaging effects of trade conflict are only partly offset by easier monetary policy. Since our last full forecast presented in our October Monetary Policy Report (MPR), the trade news has been mixed. The Canada-US-Mexico trade agreement appears to be close to ratification. For most of the period, headlines have suggested progress in the trade conflict between the United States and China, although there continue to be many twists and turns. Financial markets, already strongly supported by central bank actions, have been reacting to trade news. Stock prices have moved close to record levels, some credit spreads have narrowed, and market volatility has been low. At the same time, uncertainty is likely to persist even if a deal is reached between the United States and China. And that uncertainty is likely to have a lasting effect. Although a global recession is not in our baseline forecast, questions remain about whether market pricing fully reflects the risks inherent in the current global situation. Commodity prices have been comparatively stable in the recent period. In this context, the Canadian dollar has also been quite stable, keeping within a narrow range. Turning to Canada, the Bank has been forecasting slower economic growth in the second half of 2019 after a very strong second quarter. That is indeed how the data are coming in. Economic growth in the third quarter was 1.3 percent, as projected in the October MPR. Underlying this slowdown in overall GDP growth was an outright decline in exports. This has been driven by global weakness and trade uncertainty and by a reversal of temporary factors that had previously boosted growth, in particular for non-energy commodity exports. Furthermore, the pace of inventory accumulation slowed, subtracting significantly from growth. On the positive side, final domestic demand in Canada grew at quite a solid pace. One thing that has surprised us was business investment. We were expecting investment to decline in the second half of this year, but instead we have seen solid growth. Moreover, data have been revised upward, revealing that investment earlier this year was higher than previously reported. Another area of strength has been housing, which is continuing to rebound. We’ve seen most regions registering gains in resales and housing starts following a period of adjustment after the national and provincial policies had worked their way through. Activity is also being boosted by strong growth in employment and wages, strong immigration and low household borrowing costs, which reflect the decline in global interest rates. House prices have also been rising modestly and household borrowing has been picking up. -8Consumption spending has also been contributing to growth. As we mentioned in October, the strong labour market, particularly in the service sector, has been underpinning the economy. While employment levelled off in October, this comes on the back of past strong gains. Moreover, wages—which could be seen as a barometer of overall labour market conditions—are picking up further. Overall, the data suggest that the labour market is continuing to tighten. Revised historical data also indicate higher disposable incomes and more saving among Canadian households than previously reported. Overall, recent information augurs well for households’ financial situations and their future spending, although consumer confidence has been softening. Government spending is a mixed picture. While it has been supporting growth recently, this support is expected to wane in 2020 as consolidation in Ontario and Alberta takes hold and the recent strength in Quebec and British Columbia normalizes. These dynamics were built into our October projection. On the federal side, the government’s fiscal plans are pending. The slowing of growth in Canada’s economy has been concentrated in goodsproducing industries, which were more heavily affected by the trade conflict and by lower commodity prices. The service sector—which now accounts for about 70 percent of the economy—has continued to show solid growth for some time. Our overall assessment is that the Canadian economy is near capacity. However, this masks significant regional differences. Oil-producing regions continue to go through a painful adjustment to lower oil prices and transportation capacity constraints, and the labour market in Alberta has been weak. Meanwhile, some other provinces are seeing strong growth in employment and wages. Finally, inflation remains broadly on target, with measures of core inflation holding steady around 2 percent. Total consumer price index inflation was 1.9 percent in October and is expected to fluctuate around 2 percent. The October reading was slightly higher than we anticipated, because of the impact of higher airfares. Inflation is expected to rise temporarily above 2 percent in the coming months, reflecting the impact of weak gasoline prices a year earlier. CPI inflation should then return to target. -9Chart 5: The service sector continues to support economic growth a. Contribution to annualized growth in GDP by industry % Percentage points -2 -2 2017Q1 2017Q3 2018Q1 2018Q3 2019Q1 Services (right scale) Construction (right scale) Manufacturing (right scale) Oil and gas extraction and supporting activities (right scale) Other goods industries (right scale) Growth in real GDP by industry, quarterly, at annual rates (left scale) Sources: Statistics Canada 2019Q3 Last observation: 2019Q3 b. Exports excluding energy, index: 2015Q4 = 100, quarterly data Index Goods excluding energy Sources: Statistics Canada and Bank of Canada calculations Services Last observation: 2019Q3 Yesterday’s decision This takes us up to yesterday’s monetary policy decision. Overall, the tone of developments in recent weeks gives us more confidence in the outlook for growth and inflation that we set out back in October. So, I and my colleagues on Governing Council decided that the current setting of the policy interest rate remains appropriate to keep inflation at our 2 percent target. - 10 In our discussion, we noted some initial signs that global economic growth is beginning to level off, as expected. In particular, we noted a recent improvement in global business investment and trade as well as stabilization in manufacturing purchasing managers’ indexes. We continue to expect that global growth will edge higher over the next couple of years. We noted that central bank actions have been supporting financial markets and that prices in many markets have been reflecting an easing of concerns about the possibility of a global recession. However, it is clear that trade conflicts remain the biggest risk to the Canadian and global economies and the related uncertainty is continuing to dampen exports and growth. We also noted that the Canadian dollar has been relatively stable. Turning to Canada, recent data show that the economy slowed sharply in the third quarter, but they also support our forecast that this slowdown will be temporary. Governing Council talked about the surprising strength of investment in the quarter. The Bank will need to assess the extent to which this strength is likely to be maintained as well as the implications for both economic growth and potential output. We also discussed the strong housing markets and moderate consumer spending seen during the third quarter. At the same time, consumer credit growth has picked up. Given these developments, we will continue to monitor how financial vulnerabilities evolve in the context of regulatory changes designed to keep riskier lending in check. Looking ahead, our interest rate decisions will be guided by our continuing assessment of the economic impact of trade conflicts. We will also be watching the sources of resilience in the Canadian economy—notably consumer spending and housing activity. And we will take into account developments in fiscal policy as we prepare to update our outlook in January.
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Remarks by Ms Carolyn A Wilkins, Senior Deputy Governor of the Bank of Canada, to the International Finance Club of Montreal, Montreal, Quebec, 19 November 2019.
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Remarks Carolyn A. Wilkins – Senior Deputy Governor International Finance Club of Montréal Montréal, Quebec November 19, 2019 Financial Stability in an Uncertain World Introduction It’s always a pleasure to be here in Montréal. I’d like to thank the International Finance Club of Montréal for the invitation. Today, I’d like to speak with you about financial stability in Canada, in a world that seems more and more uncertain. This is part of our commitment to update Canadians twice a year about financial-stability issues that are relevant to them.1 The Canadian economy is performing relatively well overall. Inflation is close to target, the unemployment rate is near historic lows, and wage growth has picked up. There are, nonetheless, important regional differences. The Quebec economy is performing particularly well these past few years, bringing many people back to work. However, the ongoing adjustment to lower oil prices continues to weigh on economic activity in the energy-producing provinces, causing hardship for many people. Beyond our shores, the global economy is facing immense challenges. The trade war between the United States and China is top of mind for all of us. Yes, there is a possibility of an initial deal. Still, uncertainty about trade policy remains high. This uncertainty has caused a global slowdown and even fears of a global recession— 1 Every spring, the Bank of Canada publishes an extensive assessment of key vulnerabilities and risks to the financial system in the Financial System Review (FSR). Bank staff also conduct research throughout the year to keep Governing Council informed of issues we may want to flag to our federal or provincial partners or tell Canadians about. You can find this material on the Bank’s Financial System Hub. I would like to thank Don Coletti and Erik Ens for their help in preparing this speech. Not for publication before November 19, 2019 13:00 Eastern Time -2though most baseline forecasts, including our own, don’t call for one. Even if the trade war doesn’t get any worse, by 2021 it could cost around US$1 trillion in lost economic output around the world. As you saw in our latest Monetary Policy Report (MPR), Canada’s being hit too, but a domestic recession isn’t in our forecast either. The trade war isn’t the only source of uncertainty. There’s Brexit, tensions in the Middle East and social unrest in Hong Kong and some countries in Latin America. Risk managers here today know how difficult it is to design business strategies in this environment. The Bank of Canada and other authorities must assess the risks and have the right safeguards in place. Ideally, you want to put the winter tires on before the snow falls. It not only protects you, but also everyone else who’s on the road. I’d like to spend my time today making three points: 1. Canada has made progress taming financial vulnerabilities over the past couple of years—but that doesn’t mean we can let our guard down. 2. The global context has worsened, increasing risks to the global expansion and the chances of financial stress that could spill over into Canada. 3. In the unlikely event of a storm, Canada’s financial system is resilient, and we are in a good position to deal with whatever comes our way. I will also share our research plan for a major issue that is shaping the financial system—climate change. Keeping vulnerabilities in check You’ve heard us say for a while now that Canada’s biggest domestic financial vulnerabilities are the high level of household indebtedness and imbalances in the housing market. We worry about these things because weaknesses in the financial system can make economic outcomes far worse if a downside risk comes to pass. Let’s remember where we were a few years ago. Household debt had climbed to nearly 1.8 times disposable income. Almost one in five new borrowers had mortgages at least 4½ times their income. National house-price growth peaked at 20 percent (year over year), with increases in the Toronto and Vancouver areas even higher into the stratosphere. The good news here is that we have made progress. Credit growth has moderated, and income growth has picked up. So the debt-to-income ratio has been stable over the past couple of years. Also, the share of new mortgages going to highly indebted borrowers fell to a low of 13 percent. Growth in home prices in Toronto has slowed to a more sustainable pace. In Vancouver, prices continue to fall relative to last year but are showing signs of stabilizing. And expectations of future price increases in these markets have come back to Earth. -3These improvements didn’t happen on their own. Federal authorities made changes to mortgage-financing rules to ensure that borrowers could handle higher interest rates or lower incomes.2 British Columbia and Ontario introduced tax measures to reduce demand for housing from non-residents and speculative buyers. And the Bank increased its policy interest rate from 0.5 percent in mid-2017 to 1.75 percent last autumn, where it remains today. We did this to achieve our inflation target, and when borrowing costs rise, credit growth slows. Due to the stricter requirements and higher mortgage rates, some people have been unable to buy the homes that they wanted. Some are buying less expensive homes, and others are saving for a larger down payment. We need to remember that house prices would have been even less affordable had authorities left the vulnerabilities unchecked. This is true across Canada, but particularly in Toronto and Vancouver. Despite the progress that we’ve made in addressing vulnerabilities, household debt is still elevated. It will likely remain high for a while, particularly if global interest rates remain low. Households’ debt-servicing costs are also at a historic high. While we seem to have avoided the hard landing in housing that many had feared, prices in Toronto and Vancouver are still about 40 percent higher than in 2015, when the pickup began. They’re also notably higher in markets that weren’t on the radar then, such as Montréal. We also see that mortgage credit growth and some housing prices have started to pick up again. The market has been boosted by a drop in mortgage rates. And the share of new mortgages going to highly indebted borrowers has started to creep up.3 Many of the same ingredients that were present in some housing markets three years ago— namely strong underlying demand, tight supply and low interest rates—are present again. This time, however, we expect that the regulatory and other measures in place will support the quality of new credit and mitigate the buildup of imbalances in the housing market. This is not the time to let our guard down, though. Robust defences are especially important when difficulties abroad could affect us at home. 2 Prudential regulators in Alberta, Saskatchewan and Quebec adopted similar guidelines, as did some credit unions—on a voluntary basis—in other parts of Canada. 3 Mortgage rates are down about 100 basis points since the beginning of the year because of weaker foreign interest rates. Data for the third quarter of 2019 show that the share of new mortgages with a loan-to-income ratio of 450 percent or greater has risen from 13 to 15 percent. Global context clouding skies This brings me to my second point. The global context has worsened, increasing risks to the global expansion and chances of financial stress. Participants in our latest Financial System Survey would agree.4 The trade war is a major concern. As I said earlier, we don’t see a recession as the most likely outcome, particularly given that global monetary policy conditions have eased in recent months. It’s still our job to understand what might happen if things were to go terribly wrong.5 That means looking at different ways that a perfect storm might play out. Numerous financial vulnerabilities at the global level are all related to the usual suspect: leverage. Total global debt is now more than 3 times global gross domestic product (GDP), much higher than it was before the Great Recession. This leaves many households, businesses and governments exposed should their financial situations deteriorate.6 It also means that an economic downturn could be deeper than usual and fraught with financial stresses. I’ve already discussed high leverage in the household sector in Canada. Other countries such as Sweden and Australia are facing similar vulnerabilities. When it comes to non-financial corporate debt, the worries extend to both advanced economies, including Canada, and emerging economies. The quality of debt has declined, with about 50 percent of investment-grade corporate bonds issued in the United States and Europe now rated BBB. In a downturn, when corporate profits are challenged, the risk is that these bonds are downgraded, making it more costly for these firms to fund themselves. Corporate debt in emerging markets has also exploded, as investors search for yield in the low interest-rate environment. China accounts for around two-thirds of the more than US$30 trillion in outstanding emerging-market corporate debt. Non-bank financial intermediation has enabled a lot of this borrowing, and cross-border flows of funds into equity and debt have grown as sources of capital flows. An increasing proportion of corporate bonds are being packaged and sold to retail investors in exchange-traded funds (ETFs). These investors are looking for higher returns, but with the sort of liquidity that they associate with equities. The biggest ETF market is in the United States, but Canada’s ETF market is also growing. The concern 4 Cyber risk also features prominently in their list of concerns. For more detail, see the highlights of our latest Financial System Survey, which we posted to our website yesterday. 5 In the October MPR, we presented a downside risk scenario with a significant rise in uncertainty. This scenario captured many channels likely to affect the Canadian economy, including foreign demand and commodity prices. It also attempted to capture some amplification from elevated household debt. It did not, however, include the effects of any financial turbulence coming from international markets. 6 See C. A. Wilkins, “The Age of Leverage” (remarks to UBC Vancouver School of Economics and CFA Society Vancouver, Vancouver, British Columbia, March 14, 2019). -5is that in times of stress, redemptions of fixed-income ETF shares could amplify volatility in the value of these shares and in prices in the underlying corporate bond market. Other riskier forms of lending, such as leveraged loans, which are increasingly being packaged into collateralized loan obligations (CLOs), have been growing rapidly too.7 Globally there’s about US$700 billion of CLOs outstanding and issuance is strong. The financial engineering behind the structure has been improved since the crisis, but there is still room for concern. For one, the quality of the underlying loans has declined, and many of them lack the usual protections through covenants. The dynamics in an unwind of any of these more complex instruments could look a lot like a case of déjà-vu. Those in Montréal during the financial crisis will remember that complexity of financial engineering and liquidity mismatch were at the heart of more than one problem. The first line of defence against these risks is clearly with people like you in this room— understanding and mitigating your own risks and building contingency plans in case something goes wrong. The Bank is stepping up our own monitoring too, especially as it pertains to non-bank financial intermediation, and is leading an initiative to build greater information sharing among federal and provincial regulators.8, 9 Now, how could the trade war create a perfect storm? What I mean by a perfect storm is a combination of an economic downturn and financial stress. An increase in uncertainty or bad trade news could be the trigger. This, in turn, could spark a sharp reversal in risk premiums and lead to a drop in prices for assets, including for houses. Creditors would see more defaults, especially from corporations with lower credit ratings. Moreover, if enough investors rushed to adjust their portfolios at the same time, liquidity would dry up, amplifying the effects.10 All of this would find its way to the banking system, making it harder for business owners and families to borrow and intensifying the downturn. Resilient to storm pressures Let me now turn to my third point: the Canadian financial system is highly resilient. 7 Leveraged loans are high-yield loans to non-financial corporations with lower credit ratings. Banks underwrite most leveraged loans and issue them in US and European markets. They are sold to a wide range of financial system participants, and a substantial share is securitized into CLOs. CLO structures are subject to tighter regulations than they were before the global financial crisis, including more stringent subordination requirements and restrictions on asset holdings. 8 See G. Bédard-Pagé, “Non-Bank Financial Intermediation in Canada: An Update,” Bank of Canada Financial System Hub (March 26, 2019). 9 The Bank chairs the Heads of Regulatory Agencies (HoA), a federal-provincial forum for discussing financial sector issues. The HoA also includes the Department of Finance Canada, the Office of the Superintendent of Financial Institutions, the Quebec Autorité des Marchés Financiers, the Ontario Securities Commission, the Alberta Securities Commission and the British Columbia Securities Commission. 10 In our May 2019 FSR, Bank staff looked at what would happen to open-ended fixed-income mutual funds in Canada if many people pulled their investments out simultaneously. -6Canadian banks are part of a global banking system that is more solid than it was a decade ago. Globally active banks are holding over US$2 trillion more capital than they were at the beginning of 2011, when the phase-in of the post-crisis reforms began. This translates to a 7-percentage point increase in their Tier 1 capital ratio.11 The leverage limits and new liquidity regulations also make these banks more resilient.12 Canada has implemented new measures to further strengthen our banking system. For example, Canada’s prudential regulator, the Office of the Superintendent of Financial Institutions (OSFI), increased the required amount of capital that Canada’s big banks have to hold to protect themselves against financial-system vulnerabilities. Canada introduced a bail-in regime to ensure that investors—not taxpayers—would take the brunt of the financial burden in the unlikely event that a big bank were to fail. Also, OSFI asked many smaller, single-business-line banks to reduce their reliance on short-term brokered funding, which can be flightier in stressful situations. The Bank of Canada, along with OSFI, evaluates these safeguards by conducting stress tests on the major banks. Given that the idea is to plan for the worst, it’s important to study extreme scenarios. The most recent test was in the context of the International Monetary Fund (IMF)’s Financial System Stability Assessment of Canada, published in June.13 The scenario used was worse than anything seen in Canada in recent decades. There’s a recession that lasts two years, the unemployment rate increases by 6 percentage points, and house prices fall by 40 percent.14 Clearly this would be very difficult for people if it were to materialize. That said, this test found that our banks could withstand even this kind of severe, system-wide shock. This says to me that efforts to increase resilience in the banking system have been worthwhile, because they would help prevent a bad situation from becoming even worse. When assessing the risks, it’s important to look at a range of scenarios. In the October MPR, for example, we studied the impact of a rise in uncertainty that’s large enough to cause the current global slowdown to become significantly worse, though not nearly as bad as in the IMF stress test.15 Our analysis found that Canada would be hit particularly hard because demand for our exports and commodity prices would both fall. The fact that household debt is higher than it was in 2008 would make things worse too. That’s because indebted households facing a deteriorating financial situation would have to adjust their consumption spending more than they would have had to in the past. In fact, this factor amplifies the negative impact on domestic consumption by about 30 percent. 11 A bank’s Tier 1 capital ratio is the ratio of its equity capital to its total risk-weighted assets. 12 See T. Gomes and C. A. Wilkins, “The Basel III Liquidity Standards: An Update,” Bank of Canada Financial System Review (June 2013): 37–43. 13 See International Monetary Fund, “Canada: Financial System Stability Assessment” (June 2019). 14 For context, the unemployment rate in Canada rose about 3 percentage points during the global financial crisis. 15 The simulation, in Box 3 of our October MPR, was calibrated to match the implicit degree of uncertainty that participants in the US overnight index swap market seem to see. -7This is a reminder of the importance of the interaction between monetary policy and financial vulnerabilities. In the current context, lowering interest rates could provide some insurance against downside risks to inflation. However, this insurance would come at a cost in terms of higher household vulnerabilities down the road. Policies such as the mortgage stress test that I spoke about earlier would help keep vulnerabilities in check if monetary policy needed to be more accommodative.16 Still, with vulnerabilities high and inflation close to target for more than a year, we said at our most recent interest-rate decision that taking out insurance wasn’t worth the cost at that time. We also said that in considering the appropriate path for policy, we’d watch how the trade situation and household vulnerabilities evolve as well as fiscal policy developments. It’s important to note that in our adverse scenario in the October MPR inflation declines but stays within the inflation-control range of 1 to 3 percent. Our policy interest rate may be relatively low now, but at 1.75 percent we still have room to manoeuvre. And, we have other options in our tool kit, such as extraordinary forward guidance and largescale asset purchases.17 Work agenda on climate change Before I conclude, let me update you on our research plan on climate change issues that are relevant to the Bank of Canada. The Bank is devoting analytical firepower to understanding how climate risks are shaping the macroeconomy and financial system. We released today a multi-year research plan, outlining some of the questions we’re tackling. This work will focus on two areas that are central to our mandate. The first relates to how climate change could affect our macroeconomic forecasting and monetary policy-making. To do our job, we need to understand the economic impact of more frequent and severe weather events. The floods this past spring were very trying for people in Quebec and other parts of the country. And they affected the broader economy. At the same time, we’re also thinking through how different sectors of the economy and the jobs that go with them could change as we reduce our carbon footprint. At the global level this could affect potential output and the neutral rate of interest. These trends are particularly relevant for a resource-rich country like Canada. The second area of research relates to financial-stability implications of climate change. There are physical risks to better understand as weather events become more severe and more frequent. We are seeing this in real time at home: annual insurance claims for 16 For more detail, see S. S. Poloz, “Toward 2021: The Power—and Limitations—of Policy” (remarks to The Chamber of Commerce of Metropolitan Montreal, Montréal, Quebec, February 21, 2019). 17 See S. S. Poloz, “Prudent Preparation: The Evolution of Unconventional Monetary Policies” (remarks to The Empire Club of Canada, Toronto, Ontario, December 8, 2015). -8property and infrastructure damage in Canada averaged $1.9 billion from 2009 to 2018—up from $200 million from 1983 to 1992.18 There are also risks related to the transition to a low-carbon economy. Investors are already adjusting portfolios to reduce their exposures to climate-related risks, and this creates repricing of carbon-intensive assets.19 The risk is that this transition doesn’t happen smoothly. As a concrete example of the work to come, the Bank of Canada is developing models that will allow us to assess different scenarios of the transition. As a first step, in the coming weeks we hope to publish a preliminary example of this kind of work. We’ve also just posted an article in The Economy, Plain and Simple that sets out why climate change matters for the economy and the financial system. This is the start of a long journey, and we are partnering with others to make progress.20 We’re a member of the Network for Greening the Financial System, which is a productive forum for central banks and other authorities.21 We’re also engaging with others to better understand how companies and investors are assessing and mitigating climate risks. Conclusion Now it’s time to conclude. The fact that the unemployment rate is near a historic low and inflation is running close to target means the Canadian economy is in a relatively good place overall. Still, I know that Canadian businesses and workers are facing considerable uncertainty about the trade environment. And there are still painful adjustments underway in energy-intensive regions. That’s why Governing Council is watching all this closely. Canada has made some hard-won progress in terms of stabilizing household debt and taking the froth out of certain housing markets. Let’s remember, though, all that debt took many years to build and will take at least as many to dissipate. With storm clouds gathering, we can’t let our guard down. This is even more important given that high global leverage would amplify any global downturn, especially if it became a recession. It is reassuring that should a storm arrive, the Canadian economy and financial system are in a good position to weather it. 18 Insurance Bureau of Canada, 2019 Facts of the Property and Casualty Insurance Industry in Canada. 19 In 2018, Canadian asset managers had around $2 trillion in assets being managed with explicit environmental, social and governance criteria taken into account. 20 We also recognize it’s important to be a leader when it comes to our own operations. We’ve developed a multi-year strategy to reduce waste and start measuring—and shrinking—our own carbon footprint. 21 For more details, see the website of the Central Banks’ and Supervisors’ Network for Greening the Financial System, which was established in December 2017, and the Bank’s announcement this past March when we were accepted as a member.
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Remarks by Mr Stephen S Poloz, Governor of the Bank of Canada, at the Greater Vancouver Board of Trade Economic Outlook Forum, Vancouver, British Columbia, 9 January 2020.
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Stephen S Poloz: Fireside chat Remarks by Mr Stephen S Poloz, Governor of the Bank of Canada, at the Greater Vancouver Board of Trade Economic Outlook Forum, Vancouver, British Columbia, 9 January 2020. * * * Introduction Good morning, everyone, and happy new year. It is great to be here in Vancouver for the Board of Trade’s Economic Outlook Forum. This part of the event has been billed as a fireside chat. And, while I am happy to share the Bank of Canada’s observations on the economic outlook, I very much hope that I will get the chance to hear from you—business leaders who are making real decisions with real money every day. At the Bank, a large and talented team uses state-of-the-art economic models and reams of data to forecast economic growth and inflation. But just as important is what we learn from talking to Canadians. So I look forward to hearing about what is on your minds for 2020. The Bank will announce its next interest rate decision and publish a Monetary Policy Report with updated economic projections in a couple of weeks. To help set the stage for our discussion today, let me set out four key areas that are top of mind for the Bank. Global trade policy developments The first is the evolution of global trade policy. This has been a pressing concern for the past three years. The impact of protectionist actions, and uncertainty about what might come next, continues to hold back exports and investment globally. On the surface, there has been some improvement on this front lately, although it remains to be seen whether this will lead to a recovery of trade and investment. The Canada-United StatesMexico Agreement is close to being ratified, and that will remove one big source of uncertainty for many Canadian companies. And the United States and China have agreed to stop raising tariffs and to roll back some of them. But a lot of damage has been done; this year, we estimate that global GDP will be around 1 percent lower than it would have been without the trade conflict. This loss will likely be permanent, even if growth resumes from that lower level. Plenty of uncertainty remains around the implications of the US-China agreement for Canadian exports and around whether any more of the new tariffs can be rolled back. Some are concerned that the next step will be for the US administration to take similar trade actions against the European Union. It is understandable that companies are reluctant to make big investments in this setting. Experience tells us that companies always find ways to cope and innovate in the face of such challenges. We want to know how companies are dealing with uncertainty and the upheaval in the global trading system. We want to know if you are rethinking the value chains that you built in the past. If so, we want to know what kinds of alternative arrangements you are putting in place and what that may mean for productivity and prices. Clearly, the Canadian economy is not immune to global developments. We are watching for signs that adverse impacts of trade disputes are being felt beyond the export sectors that are directly affected. So far, all of the trade actions have been against firms in the goods sector, and the service sector has remained relatively resilient in most countries. We are looking to see the extent to which weakness from manufacturing may be spreading to services, employment, consumer spending or housing. In this regard, the most recent data have been mixed, so we continue to monitor the situation closely. 1/3 BIS central bankers' speeches By the way, next week we will begin publishing a regular report about the Bank’s quarterly Canadian Survey of Consumer Expectations. From now on, we will publish this alongside our current report on the Business Outlook Survey. Taken together with data from our Senior Loan Officer Survey, these give a more complete picture of the expectations of consumers, firms and lenders as an input into our interest rate decisions. Labour and housing markets A second area we will be watching closely is the intersection between Canada’s labour and housing markets. Our labour market has shown a healthy trend over the past year. Even though growth in new jobs seems to have slowed very recently, wage growth has continued to strengthen. We will be watching the data carefully to see how much of the recent moderation persists. In this respect, it is important to understand that labour market conditions vary quite a bit across different regions. Meanwhile, population growth has increased recently, driven by immigration. This, too, has varied across regions. Provinces such as British Columbia, Ontario and Quebec, where job growth has been strong, continue to attract the bulk of new immigrants. This combination of job growth and rising population has supported a rebound in housing over the past year. Should this housing rebound continue, we will be watching for signs of extrapolative expectations returning to certain major housing markets—in other words, froth. The fact is, the fundamental demand for housing appears to be outpacing our ability to build new homes, which can put renewed upward pressure on prices. It can be very unhealthy when the situation becomes speculative because it can lead to a sudden downdraft in house prices later, with wider implications for the economy. Stronger housing activity also means more household debt, of course, which continues to be Canada’s biggest financial system vulnerability. The good news is that with the B-20 guideline working to reduce the riskiest borrowing, we are confident that the stock of household debt is becoming less of a threat over time. Assessing the economy’s capacity The third area is business investment. As you know, the trend in business investment has been running below expectations for the past three years. We ascribe this mainly to uncertainty around trade rules. However, we received a surprise with the national accounts data for the third quarter, which were published at the end of November. This report showed unexpectedly strong growth in business investment. What is more, previous data were revised upward quite significantly. Staff have been digging into the data, aiming to get a better understanding of what is happening with investment. This is crucial to the outlook for the economy because investment is both important for growth and vital for building the economy’s productive capacity. And the whole concept of investment is evolving with the digitalization of the economy, making it much harder for Statistics Canada to measure. We will have a more complete narrative around this issue in a couple of weeks. But one element that I can mention today is that the revisions have made the federal government’s infrastructure program more visible in the data. What are financial markets telling us? The fourth major area for us is to understand what financial markets are telling us. You may recall that a year ago many commentators were talking about the inverted yield curve—shortterm interest rates were higher than long-term yields in many markets. Some took this as a sign 2/3 BIS central bankers' speeches of imminent recession in Canada and elsewhere. At the time, we were forecasting economic growth for 2019 of close to 2 percent, and some saw this as far too optimistic. By last October, the Bank was estimating 2019 growth would be about 1.5 percent—a little less than what we had said a year ago, but not too far out of line. The final result will depend on the fourth quarter, but the point is, the dreaded inverted yield curve did not lead to a recession last year. There is certainly some historical correlation between inverted yield curves and recessions. However, in a period of low interest rates and generally flat yield curves, we may see more frequent inversions that indicate slowdowns, rather than recessions. Meanwhile, many stock markets have been posting record highs lately. This suggests that markets are taking a relatively positive view of the prospects for corporate earnings, despite all the uncertainty over the global trading environment. Certainly, it seems that the potential downside risks have eased as the United States and China approach a deal. This all bears watching during the coming year. Perhaps the lesson from all of this is this: never ignore what markets are telling you, but keep in mind that they are prone to exaggeration. New $5 note coming That gives us at least four things to talk about in the fireside chat. But I want to make it five. That is because the Bank of Canada is close to announcing plans for a new $5 bank note. An ongoing priority for us at the Bank is providing Canadians with bank notes that include the latest security features so that they can continue to use them with confidence. I can tell you today that we will soon be launching public consultations about who should appear on the new $5 note. This will be similar to the public consultations that led to the selection of Viola Desmond for the $10 note. This time we will be asking all Canadians to nominate any historic Canadian—someone who is truly banknote-able. So stay tuned for details about how you can get involved, coming around the end of the month. With that, let us now turn to our discussion. 3/3 BIS central bankers' speeches
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Opening statement by Mr Stephen S Poloz, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 22 January 2020.
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Stephen S Poloz: Release of the Monetary Policy Report Opening statement by Mr Stephen S Poloz, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 22 January 2020. * * * Good morning. Senior Deputy Governor Wilkins and I are glad to be here to answer your questions about today’s interest rate announcement and our Monetary Policy Report (MPR). Before turning to your questions, let me briefly summarize the substance of Governing Council’s deliberations. You will recall that in October we were most occupied with the deteriorating global outlook. We could see clearly that this was affecting Canada’s economy too—not only through exports and the manufacturing sector, but also through the effects of heightened uncertainty on firms’ investment decisions. However, primarily because of a strong recovery in the housing sector and a healthy labour market, the Canadian economy was demonstrating good resilience overall. Quite a lot has happened during the past three months. Global economic growth appears to have bottomed, as shown by an upturn in trade and manufacturing indicators. Uncertainty remains elevated, of course, and in some ways has worsened, given rising geopolitical tensions in the Middle East that had tragic consequences. But the Phase One China-US trade deal and the pending ratification of CUSMA are positive developments that should lead to lower business uncertainty over time everywhere, including in Canada. At the same time, however, indicators of the Canadian economy have turned decidedly mixed. The National Accounts data for the third quarter of 2019 showed a significant slowdown, as we expected, and monthly GDP data have extended that slowdown into the fourth quarter. We also received a string of disappointing readings related to the Canadian consumer. Vehicle sales, retail sales more generally, consumer confidence and job growth all softened. We are now monitoring fourth-quarter growth of only 0.3 percent. At the same time, third-quarter investment spending was surprisingly strong. Statistics Canada’s historical revisions showed more growth, more investment from government infrastructure spending and a higher household saving rate than previously thought. In short, the Canadian economy last year was in a stronger position than we previously believed—operating close to capacity with inflation near target. Much of Governing Council’s deliberations focused on how persistent this recent slowdown in the domestic economy might be. The Bank’s outlook is for a rebound in growth to about 1.3 percent in the first quarter and a pickup to about 2 percent after that. Supporting this outlook is the view that the slowdown in late 2019 may reflect a greater passthrough from international developments than previously expected, in which case the recent pickup in global indicators is reassuring. Another supportive interpretation is that some growth indicators were affected by temporary factors, including an early winter on the Prairies, pipeline shutdowns and strikes. A positive reading on employment in December reinforced this interpretation, along with the understanding that online sales were very strong this past holiday season and much of these are not captured in Canadian retail sales data. Countering this view would be the possibility that Canadian consumers have turned more cautious, perhaps in response to global political developments, elevated household debt, or layoffs in the manufacturing sector and in the public service in certain provinces. This interpretation was reinforced by negative consumer confidence data during the fourth quarter, higher estimates of the household savings rate and soft consumer credit growth. These ingredients might point to a more prolonged consumer slowdown. This is not our forecast, but we agreed to monitor the data closely with this downside risk in mind. In this respect, weekly 1/2 BIS central bankers' speeches survey data suggest that consumer confidence may have bottomed sometime in December. Also, housing remains solid in most regions of the country, even if it is growing less quickly than it did earlier in 2019. In October, we deliberated whether the downside risks coming from outside Canada were sufficient to warrant a move to lower interest rates. At that time, we concluded that they were not, given the trade-off we faced against potentially fuelling increased financial vulnerabilities. For this decision, we began the exercise with reduced downside risks coming from outside Canada, as expected, but at the same time, a crystallization of some domestic downside risks. After taking these developments on board, our analysis suggested that overall excess capacity in the Canadian economy has increased, which will bring a degree of downward pressure on inflation over the projection horizon. You can see this in Chart 15 of the MPR. Let me make two comments related to this. First, we believe that the excess capacity is not uniformly distributed, but is concentrated on the Prairies and in Newfoundland and Labrador. Second, our estimate of the output gap is based on a partially updated estimate of the economy’s potential. So, there may be more uncertainty around the current estimate than usual. We will have a more fulsome update in the April MPR. At the same time, household financial vulnerabilities remain elevated, although we will be analyzing the positive implications of a higher household savings rate for those vulnerabilities. All things considered, then, it was Governing Council’s view that the balance of risks does not warrant lower interest rates at this time. In forming this view, we weighed the risk that inflation could fall short of target against the risk that a lower interest rate path would lead to higher financial vulnerabilities, which could make it even more difficult to attain the inflation target further down the road. Clearly, this balance can change over time as the data evolve. In this regard, Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast. In assessing incoming data, the Bank will be paying particular attention to developments in consumer spending, the housing market and business investment. With that, Senior Deputy Governor Wilkins and I will now be happy to take your questions. 2/2 BIS central bankers' speeches
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Remarks by Mr Paul Beaudry, Deputy Governor of the Bank of Canada, at Laval University, Quebec City, Quebec, 30 January 2020.
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Remarks by Mr Stephen S Poloz, Governor of the Bank of Canada, before"Women in Capital Markets", Toronto, Ontario, 5 March 2020.
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Stephen S Poloz: Economic progress report - we all have work to do Remarks by Mr Stephen S Poloz, Governor of the Bank of Canada, before”Women in Capital Markets”, Toronto, Ontario, 5 March 2020. * * * Introduction Thank you for the invitation to be here today. It is particularly fortunate that I am here just before International Women’s Day to speak with Women in Capital Markets—a group that strives to increase the participation of women in the finance industry. This is important, and not just because you are promoting more equitable outcomes in the sector. It is important because we know that a more diverse and inclusive workforce leads to better decision making and stronger economic growth. The Bank of Canada actively shares your goals. Back in 2017, we established the Master’s Scholarship Award for Women in Economics and Finance. The aim is to attract and advance women in the core areas of our work. The recipients receive a cash scholarship, mentorship with a Bank economist and a job offer. The seven most recent winners were announced last month, along with the winners of Bank scholarships for indigenous students and students with disabilities. Congratulations to everybody. I am here to explain our decision yesterday to cut interest rates by half a percentage point. Not surprisingly, the threat to the global economy of COVID-19—the coronavirus—played a central role in our deliberations, and we are coordinating actively with other G7 central banks and fiscal authorities. People are rightfully concerned about the situation, given the human toll the virus is taking and the tragic consequences for those affected. At this stage, the disease is only partly understood. We will count on our public health authorities to give us good advice and contain the situation in due course. The Bank’s job is to think about how COVID-19 may affect the economy. It has already disrupted the Chinese economy significantly. This is having ripple effects everywhere because Chinese producers are highly integrated with the rest of the world through supply chains. As the virus spreads, that disruption may be repeated in many other countries. Of course, travel plans are being cancelled, with obvious implications for consumer spending and travel-related business. But there may be more persistent economic effects through eroding consumer and business confidence. Indeed, Canadian companies, many of whom had already been forced to the sidelines by uncertainty over the future of NAFTA and the US-China trade war, could retrench further. The Canadian economy has demonstrated good resilience in the past couple of years. That resilience could be seriously tested by COVID-19, however, depending on the severity and duration of its effects. So, before I discuss yesterday’s interest rate decision in detail, let me spend a few minutes on the foundation of that resilience—Canada’s strong labour market. Today’s labour market The basic story of the Canadian labour market is similar to that of a number of other major economies. Even though unemployment is low, there is a sense of unease among many people. Some worry about being displaced by technology or foreign competition, others about finding stable work in the gig economy. Still, the numbers clearly show that the Canadian labour market is in good health overall. Last 1/5 BIS central bankers' speeches year, nearly 300,000 jobs were created in Canada. The unemployment rate was below 6 percent throughout 2019, near its lowest in more than 40 years. Meanwhile, wage growth has increased from around 2 percent to near 3 percent. Importantly, the quality of jobs is also improving. There are a few ways to look at job quality. First, job gains have been concentrated in full-time work. Second, the share of people working parttime involuntarily has shrunk to near the lowest in more than a decade. The Bank will publish a comprehensive staff analytical note in the coming weeks that looks at a wider range of indicators of earnings, job security and work-life balance. It shows that job quality has clearly improved in Canada over the past five years. Another sign of labour market health is that many people are changing jobs to get a better match with their skills and experience—a process economists call churn. Nationwide, churn is now at levels last seen more than a decade ago, before the global financial crisis. The latest available data show that Canadians who change jobs are seeing their wages rise by 12 to 14 percent. There is little doubt that this job switching is raising productivity in the economy, and the latest data do indeed show a rising trend in productivity. There is more. It is taking less time on average for unemployed people to find jobs. And there are more than half a million job vacancies in the economy. This meshes with what I hear from business leaders across the country, who say that their biggest challenge is finding qualified people to fill existing vacancies. Of course, these are all national statistics, which mask some pretty stark regional variations. We are well aware of the difficulties facing oil-producing regions, for example. The 50 percent plunge in oil prices back in late-2014 contributed to a similar drop in investment spending. Combined with ongoing transportation constraints, this boosted Alberta’s unemployment rate, which was around 4.5 percent before the oil price shock, to over 9 percent by late 2016, with young men facing the highest unemployment. The latest jobless rate in Alberta is 7.3 percent. This tells you that, while the economy is adjusting, it remains a long and difficult process. On the other side of the coin, labour markets have been quite tight outside of the prairies, according to our Business Outlook Survey. And two of the provinces with the strongest economies, British Columbia and Quebec, also feature the highest job vacancy rates. Another key measure of labour market health is the participation rate. This is the percentage of working-age people who are either employed or actively looking for work. A rising participation rate can signal that people who dropped out of the labour force earlier are returning. This is good for their own prospects and for the country’s economic potential. Participation rates fell sharply in the wake of the global financial crisis and the slow recovery that followed. At the time, a major preoccupation for the Bank was the possibility that people would be unemployed for so long that their skills would become less valuable—a process economists call labour market scarring. Fortunately, labour force participation rates have risen in all age groups. This makes the recordlow unemployment rates we are seeing doubly impressive, especially given the setbacks we have had along the way, such as the drop in oil prices. This is not to argue that higher labour force participation is always a good thing. For seniors, for example, it could mean either that they are happily extending their working lives or that they need to work longer because they are not fully prepared for retirement. Still, when you look at all the indicators, you can see that the labour market has been, and continues to be, a source of resilience for the Canadian economy. A solid, secure job is the primary basis for consumer confidence and household spending, which is the primary engine of growth of any economy. 2/5 BIS central bankers' speeches That said, it is also plain to see that there is still work to do. Sectoral weakness in the Prairie provinces and in Atlantic Canada remains a concern. On another front, Canada’s population includes several groups that have been chronically underemployed, representing significant untapped potential. In particular, the female participation rate is still about 8 percentage points less than the male rate. And the Indigenous participation rate is well below that of the general population. Helping new immigrants enter the workforce is another potential growth area. As our workforce ages, we are generating barely enough new workers to replace retiring baby boomers, so immigration is key to our future economic growth. Looking underneath this trend, unemployment rates for immigrants after 5 to 10 years is about the same as for the general population. However, in those first five years, the unemployment rate of new immigrants is higher than average, probably due to barriers around education equivalency. Improving labour market health Given the importance of labour market health to our economic resilience, it is natural to ask whether there are policies available to strengthen it further. For its part, the Bank of Canada’s role is to continue with a monetary policy anchored on inflation control. By acting in a way to keep inflation on target, we help to stabilize economic growth and keep the economy near its potential. This in turn means that the economy delivers the most jobs and income that it can without creating faster inflation. For example, consider the experience of 2015. We knew that the collapse of oil prices would lead to a large drop in income and investment for the entire economy and cause inflation to head below target. As a consequence, we cut interest rates immediately, without waiting for the adverse effects to appear. Lower interest rates helped bring inflation closer to target and helped the economy as a whole return more quickly to full capacity and full employment. This adjustment process sounds very simple in abstract. But behind that economic theory we are talking about real people. For those directly involved, adjustment can be very difficult and painful. What is more, the situation forces individuals to take on all the related risks. Consider someone working in the energy sector who lost their job when oil prices collapsed. Even if they can find suitable work in another province, they may have a spouse who is reluctant to leave a good job and children who are settled in their school and community. They may need to sell their house, which could be difficult if the local real estate market has slowed. Houses in the new location may be more expensive or difficult to find. It is not easy to face these risks and overcome these barriers. That is why the adjustment process takes a long time. In 2015, these adjustments were facilitated by lower interest rates and a depreciation of the Canadian dollar. Obviously, more targeted labour market policies lie beyond the Bank’s purview. Still, it makes sense for policymakers to address impediments that make it hard for workers to be matched up with those half-million job vacancies. There may be new ways of helping people deal with the risks involved in relocation, or overcome regional barriers to job matching. For example, there may be areas where we could make it easier for skilled workers and professionals to recertify to qualify for a job in a different province. We may also be able to learn from international experience in terms of improving our educational, training and retraining programs. I mentioned earlier that, despite low unemployment, people express a sense of dissatisfaction and unease about their future. It is possible that the distribution of income is contributing to this. Total labour income as a share of the Canadian economy began to trend downward nearly 30 years ago and has remained in a lower range for the past 10–15 years. Opportunities for globalization of supply chains and the steady increase in automation technology have no doubt reduced employee bargaining power over time, not to mention declining union membership. 3/5 BIS central bankers' speeches Bearing in mind that globalization and automation also generate economic growth that benefits everyone, it is clear that there is no simple solution to this. However, it is a useful metric to track when considering alternative policy ideas. Yesterday’s decision All that said, the Canadian labour market has certainly been important to the economy’s resilience. Its strength has helped support the growth in incomes and household consumption that we have seen. However, it is just one factor that the Bank’s Governing Council looks at when we sit down to take our monetary policy decisions. Let me turn now to yesterday’s announcement. It is important that we put recent developments into proper context. Business investment has been falling short of expectations in Canada for the past three years. Six months ago, we were seeing signs that the US–China trade war was beginning to affect Canadian exports and investment even further. In October, we pointed to Canada’s two-track economy, where soft exports and investment were being offset by a recovering housing sector, a strong labour market and solid consumer spending. But we were concerned that the effects of the trade war could eventually tilt the balance of risks against us. With the economy operating very close to its potential, the unemployment rate near historic lows and inflation on target, Governing Council judged that the risk that growth would slow was not great enough to warrant a cut in interest rates. The main reason was that lower interest rates could reduce the downside risk to growth but could at the same time increase financial vulnerabilities. And this would make it harder to achieve the inflation target in the future. In January, the conditions had changed but the reasoning behind our decision was similar. Consumer confidence declined in late 2019, but there seemed to be a reasonable chance that this would prove temporary. Furthermore, there were signs that the global economy was bottoming out, and there was a growing consensus that world economic growth would edge higher in 2020. Accordingly, we again acknowledged that there were downside risks to the Canadian economy. But, with the labour market in a very solid situation, we felt that the downside risk was not sufficient to warrant lower interest rates. A lot has happened in the past six weeks. In particular, the global economy will, at the very least, be significantly disrupted by COVID-19 in the first half of the year. It is possible that the global economy will snap back quickly after health professionals have managed the situation and conditions have returned to normal. However, the outbreak and its effects could be more persistent. Consumer and business confidence could be set back for a longer period of time, causing economic growth to slow more persistently. This could include longer-term layoffs, for example. At this point, we simply do not know. Of course, the coronavirus is not the only issue on the table. Just last week, we received the detailed economic report on the fourth quarter of 2019 from Statistics Canada. As expected, this report shows that the economy slowed significantly in late 2019. Some of this was due to special factors, such as an early winter that left some crops to rot in the fields, the Canadian National Railway strike, the shutdown of the General Motors plant in Oshawa and so on. Still, economic growth in the fourth quarter was lower than 1 percent when you take out the effect of the special factors. This is because some of the slowdown was more structural—exports remained weak, business investment declined and the recovery in housing moderated. The one positive was consumer spending, which remained solid even while the savings rate went up further. Consumer confidence did rebound in January, as we had hoped. In short, the solid labour market we discussed earlier is giving the economy a measure of resilience. What about the start of 2020? In addition to the impact of COVID-19, there are other factors: the strike by Ontario teachers, unusual weather and the rail blockades. We can hope that all of these 4/5 BIS central bankers' speeches factors prove to be temporary, but it seems that we are headed for at least another quarter of very slow economic growth. Since it is already March, these factors could easily affect the second quarter. There is a real risk that business and consumer confidence will erode further, creating a more persistent slowdown, especially given recent declines in stock markets. Furthermore, world prices of commodities have dropped by more than 10 percent and oil prices by close to 20 percent since the start of the year. Commodity prices are a very important channel for transmitting international shocks to the Canadian economy. With the oil-producing regions of our economy already stressed, this shock can only deepen and prolong the adjustment process discussed earlier. And the effects go beyond oil. These stresses will inevitably find their way from commodity-producing regions into other parts of the country as those who are affected directly spend less money on everything. In light of all these developments, the Canadian outlook is clearly weaker now than it was in January. When the economy is operating close to its potential and inflation is on target, a riskmanagement approach to monetary policy often recommends unchanged policy in the face of a small shock. However, risk management demands a prompt and sizable policy response to larger shocks to ensure that the economy remains well anchored. Governing Council agreed that the downside risks to the economy today are more than sufficient to outweigh our continuing concern about financial vulnerabilities. Indeed, declining consumer confidence would naturally lead to reduced activity in the housing market. In this context, lower interest rates will actually help to stabilize the housing market, rather than contribute to froth. Further, we expect that the B20 mortgage lending guidelines will continue to improve the quality of the stock of mortgage debt. Many of the implications of COVID-19 lie beyond the influence of monetary policy and authorities in Canada and around the world are focused on addressing the situation. For its part, monetary policy can contribute by buffering their effects on consumer and business confidence, thereby helping the economy bridge the situation. This contribution can be especially powerful when the shock is global and the response is coordinated. As the COVID-19 situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target. While markets continue to function well, the Bank will continue to ensure that the Canadian financial system has sufficient liquidity. And we continue to closely monitor economic and financial conditions, in close coordination with other G7 central banks and fiscal authorities. I would like to thank Erik Ens for his help in preparing this speech. 5/5 BIS central bankers' speeches
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Remarks by Mr Timothy Lane, Deputy Governor of the Bank of Canada, to the CFA Montréal FinTech RDV2020, Montreal, Quebec, 25 February 2020.
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Timothy Lane: Money and payments in the digital age Remarks by Mr Timothy Lane, Deputy Governor of the Bank of Canada, to the CFA Montréal FinTech RDV2020, Montreal, Quebec, 25 February 2020. * * * Introduction Good afternoon. Thank you very much for inviting me here today to share some thoughts on how technological innovations are transforming the world of money and payments. Technology has certainly changed every aspect of life. People now work, shop and stay in touch with each other very differently than even 10 years ago. Technology is also changing the way Canadians pay for things. Digital payments in the form of debit, credit and prepaid cards are commonplace. We are also seeing mobile payments like Apple Pay and Google Pay, as well as the ability to send money by email. There is even limited use of cryptocurrencies like Bitcoin. The Bank of Canada is looking carefully at how money and payments are evolving. This is because one of our key public policy objectives is to help ensure Canadians can use their preferred methods of payment with confidence. New technologies in our payment systems mean new opportunities and benefits for consumers, businesses and financial institutions. But they also raise the potential for new risks to our financial system. In my remarks today, I want to talk about how the Bank of Canada is responding to this evolving environment. And part of our response involves looking at whether a case could—or should—be made in the future for a digital currency issued by the Bank of Canada. So I will share our contingency planning for that eventuality. Today’s payment ecosystem Let’s start with some basics regarding the current payment ecosystem. Most of what we think of as money today consists of bank deposits. And most payments— whether by debit, credit, direct transfer or cheque—involve the transfer of funds between banks or other financial institutions. Such transfers are supported by payment systems—the hardware and software that allow any financial institution to transfer funds to another. In Canada, these systems move more than $200 billion every business day. The Bank of Canada plays a distinct role in payments. This is because payments from one financial institution to another are finally settled through a transfer of funds between their accounts at the Bank of Canada. The Bank is also responsible for overseeing and regulating the whole system. In addition, we design, issue and distribute bank notes—the cash Canadians physically exchange with others to purchase goods and services. So let’s talk about cash. 1/8 BIS central bankers' speeches Cash is an old and simple payment technology. It has stood the test of time because it has several important advantages. First and foremost, cash is safe. It is legal tender with a relatively stable value and is widely accepted for payment. It also establishes confidence in the banking system. A bank’s customers can be reassured that, any time they want, they can convert their deposits into cash. Furthermore, cash is universally accessible. Anyone can use it, including people who don’t have bank accounts. Perhaps not surprisingly, then, cash is very important to those who may face challenges accessing alternative payment methods—such as the homeless and those living in remote communities. Cash is resilient—it works even when computer systems go down or during a power failure. It is private—you can buy everyday goods and services without revealing your identity or your personal or financial information. Cash also preserves an element of competition in the financial system, by providing a cheap and reliable alternative to credit and debit cards. All this being said, cash also has its limitations. It is more suitable for relatively low-value payments because of the obvious security risks of carrying around large volumes of cash. And it cannot be used to make purchases remotely. With this background in mind, I would like to discuss some issues that Canada’s payment ecosystem is currently facing. Changes and challenges Recent advances in technology offer opportunities to improve our core payment infrastructure. We have seen this at the retail level, with contactless “tap and go” payments, mobile banking and other innovations. The structure of our economy is also changing, with transactions increasingly taking place online. Partly reflecting these innovations, we are seeing a steady decline in the use of cash in retail transactions. In a 2017 Bank of Canada survey that asked Canadians how they pay for goods and services, respondents said that they use cash for about one-third of their transactions—compared with more than half just a decade ago. And about 1 in 10 Canadians now claims to be entirely “cashless.”1 In some countries, such as Sweden and Norway, the use of cash has declined to a level where merchants are finding it too costly to accept cash, and banks are scaling back their processing services. I’ll talk later about how we can maintain access to cash, particularly for those “unbanked” or “underbanked” members of our society. In addition to these trends driven mainly by technology, globalization has put the spotlight on cross-border payments. 2/8 BIS central bankers' speeches Canadians who have family members in other countries often face high costs and long delays in sending them money. Businesses face similar drawbacks in paying for goods and services they purchase from outside Canada. These frictions and costs have motivated private digital currencies to aspire to make it easier and cheaper to move funds around. We are all familiar with the explosion of cryptocurrencies over the past few years. Bitcoin and similar digital assets were introduced with the hopes of becoming the money of the future.2 That hasn’t happened, nor is it ever likely to. Transacting in cryptocurrencies such as Bitcoin is just too expensive, and their purchasing power is too unstable. A more recent and potentially impactful innovation is so-called “stablecoins,” which are designed to maintain a stable value in terms of a currency or commodity. In most cases, they are backed —either fully or in part—by currency holdings. Compared with earlier forms of cryptocurrencies, stablecoins have better prospects for widespread adoption—and, correspondingly, greater potential to further transform the world of money and payments. The most prominent example is Libra, a stablecoin that Facebook, along with an association of other companies, is planning to launch. Libra would run on an existing messaging platform with strong brand recognition. This would give it the potential to reach billions of people—including many with little or no access to banks or financial services. It’s tough to predict if Libra will ever live up to its promises or even come into existence. But it is a good example of a transformative technology that affects how the Bank needs to respond to the future of money. Building a modern ecosystem So let me now talk about some key areas where the Bank of Canada is focusing in order to adapt to this fast-moving world of payments. First, we are working to make sure that Canadians who wish to use bank notes can continue to do so. We are working with financial institutions to maintain a state-of-the-art distribution system for cash. This will help ensure that accepting cash remains cost-effective for merchants. Some other jurisdictions have adopted more prescriptive approaches, including laws requiring acceptance of cash at the point of sale. These approaches have both costs and benefits that should be further examined. A second area of focus is the Bank’s support for Payments Canada’s payment modernization efforts. The goal is to provide consumers, businesses and financial institutions with a modern, fast and convenient payment system. One exciting component of this project is the construction of a fast, always-on payment system called Real-Time Rail (RTR). This system is being designed with building blocks to meet consumers’ payment needs today and in the future. 3/8 BIS central bankers' speeches Based on this, you may imagine paying for groceries as you pick them off the shelf. Or ordering and paying at your favourite shawarma truck by tapping your phone to a code on the menu. The Bank is working with Payments Canada and stakeholders like Interac to ensure RTR is resilient and promotes competition and innovation in the Canadian payment ecosystem. To complement RTR, the government is exploring open banking—also known as consumerdirected finance. The intent of open banking is to give customers greater control of their financial data and safe access to a wider range of financial services, while reducing costs. This too would help foster a more innovative and competitive financial system. The government is also looking to implement a new Retail Payments Oversight Framework that will require payment service providers to beef up their risk management practices, and better protect end-users from losses. The Bank has been tapped as the regulatory authority to monitor compliance, including maintaining a public registry of regulated payment service providers. A third area of focus is an international one—cross-border payments. The Bank of Canada collaborated with the Bank of England and the Monetary Authority of Singapore to identify the “pain points” in cross-border payments.3 Work on this topic is continuing through domestic and international forums, including the G20. It goes without saying that any improvements to moving money internationally would need to maintain vital safeguards—such as know-your-customer regulations—that detect and deter exploitation of the system for criminal or terrorist purposes. A fourth important area of focus is private digital currencies, some of which have been touted as the answer to the challenges of cross-border payments. While the future of Libra and other stablecoins is uncertain, private digital currencies are a global phenomenon. A global effort is required to understand the wide-ranging implications and ensure the regulatory framework is fit for purpose. To this end, the Bank of Canada is pleased to be working with the Financial Stability Board, alongside 23 other jurisdictions, to identify supervisory and regulatory issues posed by fintech innovations.4 We are holding fast to the principles that innovation, competition and consumer choice are good, and that disruption is not the enemy. But it is essential to understand and manage the risks to individuals, businesses and the entire financial system that arise from any product offered to the public. Contingency planning for a central bank digital currency All of this leads me to my final area of focus. In the context of the issues I’ve raised today, there has been increasing discussion around a central bank digital currency (CBDC). We can think of this as a digital version of cash. Digital currencies are designed to provide the same benefits as cash—safety, universal access, resilience, privacy and competition—but in an electronic format that could be used for online transactions or at the point of sale, using a mobile phone or a special card or device. 4/8 BIS central bankers' speeches It would be truly equivalent to cash. Today we have released a comprehensive document that outlines in greater detail our recommendations with respect to a CBDC. I encourage you to visit our website and read some of our thinking, but I’ll share the highlights with you. We have concluded that there is not a compelling case to issue a CBDC at this time. Canadians will continue to be well-served by the existing payment ecosystem, provided it is modernized and remains fit for purpose. This means that: bank notes remain available to Canadians who want to use them, including marginalized populations in our society; the Canadian payment system is brought up to date and problems with cross-border payments are addressed; and an appropriate regulatory framework for stablecoins and other private digital currencies is established, both in Canada and globally. All this being said, the world can change very quickly. The Bank of Canada can imagine scenarios in which we would consider issuing a CBDC so we can continue to provide Canadians with trustworthy methods of payment. One scenario would be if we ever reach the tipping point where cash could no longer be used for a sufficiently wide range of transactions. That scenario would raise several potential concerns: payment services offered by large financial institutions could become the only game in town, giving them increased market power; people without adequate banking services would find it even more difficult to participate fully in the economy; people would lose the ability to conduct transactions privately; and the system could have a single point of failure, making it more vulnerable to computer system breakdowns and power outages. Of course, even such a shift toward a cashless society does not automatically mean the Bank would issue a CBDC. That’s a choice that Canadians and their elected representatives would need to make at the time. A second scenario that may lead to considering a CBDC is widespread use of private digital currencies. This could be one dominant digital currency created by a big tech company—a monopoly that would erode competition and privacy and pose an unacceptable challenge to Canadian monetary sovereignty. We could also imagine not one, but several, private digital currencies emerging. In this case, consumers and merchants would face an assortment of different methods of payment— reminiscent of a time before the Bank of Canada was created, when the country had multiple issuers of bank notes. In both scenarios, there would be an argument for the Bank of Canada to step in. The Bank would do this as a trusted public institution, creating an official digital currency that is designed with the interest of the public as its top priority, with no commercial motive. 5/8 BIS central bankers' speeches This last point is important, according to a poll published a few weeks ago by the Official Monetary and Financial Institutions Forum. More than half of the people surveyed in 13 countries said they would prefer a digital currency issued by their central bank. Major internet technology companies ranked lowest in public confidence.5 Beyond this, it is central to both our monetary sovereignty and the Bank’s ability to conduct monetary policy that we preserve our Canadian dollar as the unit of account—meaning that prices are quoted in Canadian dollars. That could be challenged if a private digital currency denominated in another currency, or basket of currencies, made serious inroads. Next steps So, where to next? While we don’t know what the future may bring, we need to move forward to work out what a potential CBDC might look like and how it could be managed, if the decision were ever taken to issue one. There are many aspects to consider in this contingency planning. How could a CBDC be integrated with other methods of payment yet be resilient so that it still works during a power failure, for example? What business model might work? Would the Bank try to develop it mainly in-house, or would it make more sense to partner with the private sector? How would a CBDC work for cross-border transactions? And, perhaps most importantly, how could we ensure that Canadians could continue to transact privately for legitimate purposes, while guarding against illicit activities like money laundering, terrorist financing and tax evasion? Answering these questions is part of our work. And we’re not alone—a recent survey by the Bank for International Settlements covering 66 central banks found that about 80 percent of them are currently engaged in CBDC work and 10 percent are likely to issue a CBDC within three years.6 We have formed a working group with the central banks of England, Japan, the European Union, Sweden and Switzerland, as well as the Bank for International Settlements. We will use this platform to share experiences as we assess potential cases for a CBDC in our home jurisdictions. But a CBDC could only be launched successfully if Canadians want it. So we will be consulting with governments and key stakeholders in provinces and territories across Canada, like those of you in the audience today. We’ll also consider which design features might make a CBDC attractive as payment technologies and the financial system evolve. We will consult with payment service providers and merchants to ensure the business model is valid and roles are clear. In addition, we are consulting with various government agencies, recognizing that many areas relevant to a CBDC are outside the responsibility of the Bank of Canada. This will include discussions on how to combine privacy with adequate safeguards against illicit use. Another essential element is that the Bank would need proper legislative authority to issue a CBDC should the decision be made to issue one. 6/8 BIS central bankers' speeches In our work, we will continue to take a holistic view across the whole payment ecosystem to ensure that all aspects—payment systems, cash and any future CBDC—would continue to function together to provide Canadians with the efficient, safe and secure payment services they need. All of this will be undertaken while ensuring we manage any risks raised by a CBDC if a decision is ever taken to issue one—not just for the Bank of Canada but also for banks, payment service providers and end-users. Conclusion In conclusion, it is clear that technology is changing the world around us. And while we cannot perfectly predict the future, we can certainly plan for contingencies. This includes readying ourselves in case a decision is made some day to issue a Bank of Canada digital currency. Some out there may question why we would even need a CBDC when so much of our money appears to flow electronically now anyway. Let’s go back to the two scenarios I presented earlier that could warrant the launch of a CBDC. The first is where the use of physical cash is reduced or eliminated altogether. The second is where private cryptocurrencies make serious inroads. If either scenario came to pass, society may be well-served with a digital currency: that is designed, issued and distributed by an organization that is guided by the interest of the public good, rather than profit; that is safe, resilient, universally accessible and private—just like cash; and that is backed by a central bank’s balance sheet and its reputation for preserving the value of our money. Our intent would not be to issue a CBDC to replace bank notes or chartered bank deposits. The public still wants both of these products, and we will support them. In fact, we are actively planning for the design of a new $5 bank note. The Bank is in the midst of a wide consultation process to ask Canadians who they want as the portrait subject of this new bank note. And as the world changes, the Bank will continue to fulfill its mandate to support secure, reliable and efficient payment options that benefit all Canadians. Thank you for your time and attention this afternoon, and I look forward to your questions. I would like to thank Scott Hendry and Darcey McVanel for their help in preparing this speech. 1 C. Henry, K. Huynh and A. Welte, “ 2017 Methods-of-Payments Survey Report,” Bank of Canada Staff Discussion Paper No. 2018–17 (December 2018). 2 T. Lane, “Decrypting ‘Crypto’” (remarks to the Haskayne School of Business, University of Calgary, Calgary, Alberta, October 1, 2018). 3 For more information on in this initiative, Phase 4 of Project Jasper, visit the Bank of Canada website. 4 Financial Stability Board, “Monitoring of FinTech.” 5 Official Monetary and Financial Institutions Forum (OMFIF), Digital Currencies—A Question of Trust. An OMFIF Report on Global Public Confidence in Monetary, Financial and Payment Institutions, 2020. 7/8 BIS central bankers' speeches 6 C. Boar, H. Holden and A. Wadsworth, “Impending Arrival—A Sequel to the Survey on Central Bank Digital Currency,” Bank for International Settlements (BIS) Papers No. 107 (January 2020). 8/8 BIS central bankers' speeches
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Opening statement by Mr Stephen S Poloz, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 15 April 2020.
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Stephen S Poloz: Release of the Monetary Policy Report Opening statement by Mr Stephen S Poloz, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 15 April 2020. * * * Good morning. Senior Deputy Governor Wilkins and I are glad to have the opportunity to answer your questions about today’s policy announcement and Monetary Policy Report (MPR). Allow me to begin with a few comments. The Canadian economy is experiencing a significant and rapid contraction. The shock is a global one, affecting all countries, but commodity-producing countries like Canada are being hit twice. In the very near term, policy-makers can do little more than cushion the blow. It is worth spending a moment to emphasize why the central bank’s inflation targets matter so much, even at a time such as this. Inflation targets were put in place around the world when the dominant worry was higher inflation. Today, the situation is very complex. However, Governing Council agreed that the balance of forces points to weaker demand and a decline in inflation as the dominant concern. Inflation targets provide an anchor for the economy—particularly inflation expectations—and a guide for policy actions equally in today’s situation. Keeping inflation close to target means taking measures to ensure that the economy stabilizes and then returns to full capacity. Failing to do so now would mean that inflation would persistently fall short of target. If inflation were to fall short of target for an extended period, faith in that anchor would be eroded, and policy-makers would face even greater challenges in returning the economy to full capacity. This challenge can become particularly acute should inflation fall persistently below zero. Subzero inflation, or deflation, would interact with existing indebtedness in a particularly undesirable way. Specifically, negative inflation would increase the real value of outstanding debts while it would erode the ability of companies and households to service their debt—a very difficult mix for the financial system. Fortunately, the risk of sustained deflation in Canada is low, for several reasons. First, there has been a vigorous and elastic response from governments to the pandemic. These actions will put a floor under the economy and lay the foundation for the subsequent recovery. This is especially true for wage subsidies, which are designed to maintain the employee-employer relationship, thereby buttressing confidence and facilitating the recovery. Second, Canada began the pandemic episode with the economy operating near potential and inflation around its 2 percent target. Just as a healthy, fit individual is more likely to shake off a COVID-19 infection, a healthy economy is more likely to recover quickly from a major negative shock. Third, Canada has enjoyed considerable success in keeping inflation close to target for more than 25 years. This means that investors, firms and households expect that the Bank will act to help return the economy to capacity and bring about stable, 2 percent inflation. The Bank’s recent actions should be seen in exactly that light. In recent weeks, Governing Council lowered our policy interest rate three times to 0.25 percent, which we consider to be its effective lower bound. These moves were based on analysis of the factors we could measure immediately—mainly the likely fallout on the economy from the collapse in oil prices, as well as the immediate effects of measures to contain the novel coronavirus. This preliminary analysis indicated that cutting rates all the way to the effective lower bound was the best contribution the Bank could make to stabilizing the economy and complementing the government’s efforts. Looking ahead, the outlook is highly conditional on how long the containment measures remain in place, and how households and firms adapt. Governing Council agreed that it would be false precision to offer its usual specific forecast. Instead, we chose to offer two plausible illustrative 1/2 BIS central bankers' speeches scenarios for the economy—one should be thought of as a “best case” given where we find ourselves today, while the other is a much more severe scenario. Many possible outcomes lie between these scenarios, but based on the Bank’s new analysis, Governing Council concluded that substantial monetary stimulus needed to be in place to lay the foundation for the postcontainment economic recovery. For the Bank’s policy actions to reach companies and households and foster a robust recovery, it is crucial that financial markets function well. In the past few days, Governing Council’s deliberations focused mainly on what additional actions the Bank could take to achieve this goal. There has been some improvement in market functioning. But important strains continue, and Governing Council acknowledged that near-term borrowing requirements of governments and the private sector are likely to pose further challenges. We decided to increase the Bank’s participation in the government’s treasury bill auctions to 40 percent of each new issue, and to underscore that our program of purchasing at least $5 billion per week of Government of Canada bonds in the secondary market could be increased at any time, should market conditions warrant it. A similar argument applies to provincial government bond markets, which are seeing significant strains—hence our decision to supplement our program to buy provincial money market securities by also buying up to $50 billion in provincial bonds. Governing Council also noted that the corporate bond market continues to show signs of stress, although our program to purchase commercial paper has helped. Governing Council reasoned that the Bank’s presence in the secondary corporate bond market would ease some of these strains and announced a $10 billion purchase program aimed at high-quality corporate borrowers. In addition, Canada’s major banks face relatively high longer-term funding costs in the corporate bond market, a factor that is leading to upward pressure on some longer-term mortgage rates, despite the 150-basis-point drop in our policy rate. For this reason, Governing Council decided to lengthen the term of its weekly repo operations to allow for funding for up to 24 months. This should lead to improved funding conditions for the major banks and therefore help companies and households benefit more from monetary stimulus. The Bank has so far accumulated over $200 billion of new assets—amounting to about 10 percent of Canada’s GDP in liquidity support for the economy—and the Bank’s balance sheet has expanded by about this amount as a consequence. This is natural at a time when financial market participants and firms seek to increase their levels of liquidity because it is the central bank’s job to fulfill those needs. If we failed to do our job, increased liquidity demands could instead lead to a contraction of credit availability, with obvious consequences for individuals and the economy. When financial tensions ease as the pandemic runs its course, these extra liquidity demands will dissipate, and the Bank’s balance sheet expansion can reverse over time. The Bank stands ready to augment the scale of any of its programs should market conditions warrant it. Governing Council agreed that the combination of aggressive fiscal action and monetary stimulus will create the best possible foundation for the recovery period. Before concluding, let me point out that this MPR is unique in one other respect. This is the 25th anniversary of the first MPR, published under Governor Gordon Thiessen’s leadership in May 1995. We have marked this event by using the same front page as 25 years ago. Ironically, I was one of the architects of that first MPR, and today’s will be my last. I wish the circumstances were more favourable. With that, Senior Deputy Governor Wilkins and I will now be happy to take your questions. 2/2 BIS central bankers' speeches
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Remarks by Mr Stephen S Poloz, Governor of the Bank of Canada, at the Ivey Business School, London, Ontario, 30 April 2020.
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Stephen S Poloz: Teachable moments from the pandemic Remarks by Mr Stephen S Poloz, Governor of the Bank of Canada, at the Ivey Business School, London, Ontario, 30 April 2020. * * * Good afternoon. Let me begin by thanking Dean Hodgson for the invitation to be with you today. I wish it were under better circumstances. The events of the past few weeks clearly fit the definition of a “teachable moment” in my field, which is central banking. It is very worthwhile to think about them now when things are still fresh —indeed, so fresh that the episode is still in motion. I will set the scene very briefly. When I returned to the Bank of Canada as Governor in 2013, the economy was operating short of its full capacity and inflation was well below target—a legacy of the 2007–09 global financial crisis. I remember giving my first speech as Governor in June 2013. I predicted that the economy would gradually make its way “home,” which lies at the intersection of 2 percent inflation and full employment. We arrived in 2014, but then oil prices collapsed, forcing a detour. For much of 2018–19 though, the economy was operating near its full capacity with inflation very close to target. And then came COVID-19. The good news is that we began this episode with a healthy economy, inflation on target and the unemployment rate at its lowest in 40 years. Just as a healthy, fit individual is more likely to shake off COVID-19, so is the Canadian economy. It is important for you to understand that when there are global shocks Canada always gets hits twice—once by the shock itself, and a second time by the associated decline in commodity prices. In other words, even if we had experienced zero cases of COVID-19, we would still have the macroeconomic effects of lower oil prices to contend with. During January and February, the virus was mostly elsewhere, but oil prices had already dropped from around $60 to around $45 per barrel. At that time, we were beginning to think about possible sudden negative scenarios due to the virus, but we knew that weak oil prices alone would necessitate some easing of monetary policy. On March 4, we cut interest rates by 50 basis points. The day after, I went to Toronto to deliver the traditional economic update speech, and there were 600 people in attendance. Some were starting to do elbow bumps, but most of the people I met gave me a warm handshake or a hug. I recall washing my hands very carefully afterward, so awareness was rising. Life has been a blur since that day in Toronto. I recall the significance of the shock really hitting me at a special meeting of major central bank governors hosted by the Bank for International Settlements (BIS) on Sunday, March 8. There we heard the first-hand experience of governors from China, Italy and South Korea. I also attended a memorial service for a friend later that day. That was my last social activity, and we were afraid to shake hands or touch the food. I will always recall my dear friend Jim’s memorial service as the moment when the penny truly dropped. I don’t have time to give you a play-by-play of the next six weeks. Let me just say that the work, the meetings, the videoconferences, the phone calls were relentless. There were global meetings of groups like the G7, G20, BIS and International Monetary Fund, all at very early hours in our time zone; bilateral calls with other central bank heads; and domestic meetings—with the CEOs of the Big Six banks, pension fund CEOs, market regulators and other Ottawa officials. And of course, many meetings with my own team, adjusting our policies and other programs in 1/5 BIS central bankers' speeches real time. During those six weeks, the Bank would cut its interest rate by a further 100 basis points to 0.25 percent, which we consider to be the effective lower bound. We have enhanced our liquidity facilities in multiple ways. We have increased our participation in Government of Canada and provincial money market auctions. We have started large-scale asset purchases of Canadian Government bonds. We have launched programs for purchasing bankers’ acceptances, commercial paper, provincial bonds and corporate bonds. It is useful to think of these actions along two dimensions. The first dimension is to ensure wellfunctioning financial markets. When risks rise, financial markets tend to seize up as everybody runs to cash. When this happens, the whole chain of financial intermediation can break down, and credit availability can shrink. Central banks can create the needed liquidity by accumulating assets that people don’t want and providing the cash they wish to hold. This allows not only for a continued availability of credit, but an expansion of credit as people and firms draw liquidity. When tensions dissipate, the process reverses. The second dimension is monetary policy. We have cut interest rates by 150 basis points since the shock began. We know this will not stimulate economic growth right now while the stores are closed. But it will lay the foundation for the subsequent recovery in the economy once containment measures are lifted. Clearly, well-functioning markets are a necessary condition for successful monetary policy. Four times per year we publish a Monetary Policy Report with our updated forecasts for the economy. As we approached our April 15 announcement date, we decided not to offer precise numerical forecasts—a controversial decision. In the circumstances, we felt it would amount to false precision. Of course, there was no shortage of forecast numbers out there. The situation seemed to be devolving into a contest for who was gutsy enough to forecast the biggest decline in economic activity. As the central bank, we don’t play that game. We heard phrases like “bigger recession than the global financial crisis,” “biggest recession since World War II” and “biggest recession since the Great Depression.” Such comparisons are unhelpful, for they use arithmetic to compare various events that had very different effects on people. A recession is a dynamic phenomenon: demand declines, firms lay off workers, confidence declines, people demand even less, more firms lay off workers; in other words, it is a negative dynamic that takes time and healing to reverse. A depression is worse; it is deeper and longer and happens because deflation interacts with debt to create widespread defaults. Neither recessions nor depressions lend themselves to a simple numerical standard. At this point, there is no reason to assume that any of these behavioural dynamics will emerge from the current episode. At the core of the policy response to the COVID-19 shock is a truly historic expansion of fiscal support. We believe these measures will put a floor under the economy as well as business and consumer confidence. In particular, the measures are designed to be elastic—to expand or contract depending on the scale of the ultimate shock to the economy. This makes it even harder to make a point forecast for economic activity because, to do so, you must analyze both the shock and the fiscal response and how they interact. You also need to distinguish between the economy’s output and its income. Another positive attribute of the fiscal response is that the wage subsidy helps maintain the connection between employees and their employers. That will make for a rapid rebound in activity once containment measures are removed. This is in direct contrast to the Great Depression, when policy-makers basically failed to respond and even worsened the situation by enacting protectionist international trade policies. The response today is designed precisely to mitigate the risk of a recessionary or depression-like negative dynamic. Indeed, the situation is much more like a natural disaster than a typical 2/5 BIS central bankers' speeches economic recession—with policies designed to essentially stop the clock and later restart it. Economic recoveries from natural disasters are usually quite rapid and robust. Instead of offering new forecasts, Bank staff worked through multiple scenarios. These were designed to help us understand the importance of assumptions around the spread of the virus and the associated containment measures, how financial markets might react, how business and consumer confidence might be affected, and how much long-term or permanent structural damage might result from the shutdown. Positives in the mix were fiscal measures, including outright income support; policies to encourage maintenance and expansion of credit; and monetary easing. With these variables, Bank staff developed two contrasting scenarios for the Bank’s Governing Council to consider. The first, “best-case,” scenario assumed that containment measures would be lifted at least in part during May. This scenario would see a decline in the economy during the first quarter of 1–3 percent, and a further decline in the second quarter that would take the economy to around 15 percent below its level at the start of the year. The third quarter would then see a significant but partial rebound in the level of activity and then a gradual recovery back to trend over the next year or two. Very little structural damage was envisioned under this scenario. The darker scenario assumed that containment measures would extend into summer, taking the economy in the second quarter as much as 30 percent below its level at the start of the year. The rebound in the second half would be even more partial, and the structural damage would be much greater. Even after two years of recovery, the level of gross domestic product (GDP) would still be well short of its original trendline under this scenario. In mid-April, there were signs that Canada’s containment measures were succeeding in flattening the curve, despite the tragedy that was unfolding in long-term care centres. Further, governments were beginning to lay out criteria for a return to work. All of this suggested to us that our best-case scenario was within reach. Nevertheless, the recovery phase requires that monetary policy contribute significantly once containment measures begin to ease. For this to happen, we need monetary stimulus to reach the ultimate borrower. That, in turn, requires more improvement in market function; in particular, posted longer-term mortgage rates were proving to be sticky because banks were still funding themselves at relatively steep rates in bond markets. Another complicating issue was that the fiscal policies so essential to a successful outcome would soon be putting significant demands on government bond markets, posing the risk that market conditions could again become strained. Accordingly, on April 15 we held our policy rate steady at the lower bound and reminded markets that our large-scale asset purchases were aimed at good market function. If our program of a minimum of $5 billion in Government of Canada bond purchases per week proved insufficient to maintain orderly markets, we would simply increase it. We also announced that we would begin purchasing provincial bonds and corporate bonds in the secondary market. By April 24, cumulative purchases of assets by the Bank stood at $260 billion, equivalent to well over 10 percent of Canada’s GDP. This has so far roughly tripled the size of our balance sheet, which began the episode at $120 billion. Some commentators have likened these operations to “printing money,” which will cause inflation down the road. Indeed, these operations do look the same as what happens when the Bank prints new bank notes. However, this is quite different. Out in the economy people are choosing to hold cash, whether by drawing on a line of credit or by selling a financial asset. If the central bank did not provide that liquidity, a credit crunch would ensue, and that would create a significant downdraft in the economy—in effect, a deflationary shock. Countering that shock requires providing the demanded liquidity until tensions ease, essentially countering a deflationary 3/5 BIS central bankers' speeches shock with an inflationary policy. Later, when the recovery begins and tensions ease, people will put their money back into financial assets or pay down their lines of credit. At that point, the process goes into reverse, and the central bank’s balance sheet can return to a more normal level. This process contrasts with “printing money,” which means expanding the bank’s balance sheet permanently and forcing newly created money out into the system. This of course would be inflationary in an economy that was functioning normally, but the whole point is that ours is not—given the forces acting on the economy, these actions are stabilizing, not inflationary. That balance of forces will shift as the recovery unfolds. If we were to misjudge the balance of deflationary and inflationary forces during the recovery, the economy could pick up too much steam and inflation could rise. We are alert to this risk and have the tools to respond should it materialize. But at present we see the risk of disinflation as more immediate. It was in the context of the unknowable scope of downside risk for the economy and inflation that I coined the phrase, “no one has ever criticized a firefighter for using too much water.” As you can see, scenario planning has played a central role in our response to the crisis so far, and I expect that will continue. Those scenarios will come into better focus as we see new data, but it will be some time before we get back to our normal forecasting environment. Certainly, we will need to monitor and adjust for any structural damage judgmentally. Throughout, our inflation target is the anchor to our activities. Inflation targeting offers investors and households an anchor for the future. It tells people that the Bank will work as hard as it can to get the economy stabilized and back on track, so as to prevent inflation from falling significantly below target for an extended period. It is that anchor and our independence from government that gives our lending programs the power to stabilize things. At present we face asymmetric risks, as the downside risks are far more dire than the upside ones. This simplifies our risk management problem for the time being. Under normal circumstances, we would also be concerned with adding to financial vulnerabilities. After all, lower interest rates are intended to promote increased borrowing and therefore spending. We have not forgotten about financial vulnerabilities—we will put more weight on them in our risk management framework once we are confident that our primary objective will be met. To conclude, here are some of the lessons for central banking I take from this teachable moment: 1. Use scenarios, but focus on the narrative they represent. Avoid numbers when uncertainty is extreme, as they can generate a cloud of possibilities that many will struggle to understand. 2. Make sure everyone understands your goals. Everything you do needs to have an explicit purpose and be part of a coherent framework. 3. Crisis conditions argue for vigorous, even outsized, responses because maintaining confidence is critical to the recovery; gradualism is unlikely to succeed. 4. Coordinated policy actions are more powerful than stand-alone ones. That coordination may be domestic, or international. Finally, a few lessons I take on the leadership or management front: Diversity of past experience pays when blazing a new trail. Crises are exhausting—a deep personnel bench is a key part of resilience. Over-invest in technology and business continuity preparedness. Stay in touch with staff—even the ordinary things must still happen. 4/5 BIS central bankers' speeches Thank you for your attention. Now, I would welcome a discussion with you. 5/5 BIS central bankers' speeches
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Remarks (via videoconference) by Mr Timothy Lane, Deputy Governor of the Bank of Canada, to the CFA Society Winnipeg and Manitoba Association for Business Economics, Winnipeg, Manitoba, 20 May 2020.
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Remarks by Timothy Lane Deputy Governor CFA Society Winnipeg and Manitoba Association for Business Economics (by videoconference) 20 May 2020 Policies for the Great Global Shutdown and Beyond Introduction Good afternoon. It is a pleasure to speak to you in these extraordinary times. Normally, the members of our Governing Council like to visit Canadians in their communities so that we can share what we know, answer your questions and hear your perspectives. I hope to do that again soon. Until then, we are making the most of the available technology to have those conversations. The crisis presented by COVID-19 is truly global in scope, and its economic and financial impacts are unprecedented in severity and suddenness. I’d like to take this time to discuss what has happened to the economy and financial system, outline how the Bank of Canada has responded, and explain how we are providing the foundation for the recovery that will come next. Concern about the pandemic began as early as January, but it was the shutdown in March that sparked a rapid and massive policy response in Canada. The crisis here, as in many countries, has demanded the use of measures we have never used before, on all fronts—fiscal, monetary and financial policy. These decisive measures have been aimed at stabilizing financial systems and helping ensure businesses and individuals alike have the means to survive in this exceptional time. I’d like to discuss two phases of this event. The first is the shutdown itself, dictated by the virus and the strong public health response. This first phase has brought with it an immediate economic contraction, as businesses shuttered and people lost their jobs. But this shutdown will be temporary if appropriate measures are taken. Already we are starting to see some reopening across Canada. This will bring a recovery. But the kind of recovery will depend on the resources companies and families have been able to tap to cope during a period I would like to thank Brigitte Desroches, Tamara Gomes, Guillaume Nolin and Lori Rennison for their help in preparing this speech. Not for publication before 20 May 2020 2:00 PM Eastern Time -2when many have no income. That takes credit and government support. How those companies and families are able to cope will, in turn, influence whether the crisis has structural effects on the economy. Because of the suddenness of the crisis, many of our established ways of thinking about policy are inadequate. We need to use other approaches to guide policy. I’d like to share with you how we are navigating this strange new world, and how we are building a bridge to the recovery. The Canadian case Unlike many previous economic crises, the COVID-19 situation is truly global: all countries are subject to the same forces. At the same time, Canada’s situation is in some ways distinct. To begin with, we had a favourable starting point, despite some vulnerabilities due to high household debt. The Canadian economy was relatively close to full employment and full capacity in January, and inflation was on target (Chart 1). We also had more room to respond with policy than many of our peers, with relatively low public debt and small fiscal deficits by international standards. Our policy interest rate was 1.75 percent before the pandemic, so we had some room for conventional monetary policy easing. And we have long had a resilient financial system. Chart 1: The unemployment rate was near 50-year lows prior to COVID-19 Monthly data % Source: Statistics Canada Last observation: April 2020 But we are also an export-dependent economy. Our energy sector in particular has been hit hard. A sudden shutdown and a staged restart From this starting point, the shutdown that began in Canada in mid-March has been unlike anything we’ve seen before. Measures to “flatten the curve” have been effective at saving lives, but they have required the closure of major parts of our economy. Economists usually think of recessions in terms of collapses of demand—but this time is different. As people were sent home and all but essential business stopped, we found ourselves in a situation where people could neither buy nor sell certain products. How deep will the contraction be? This will depend mostly on how stringent the restrictions are and how long they last. Statistics Canada estimated a contraction of 2.6 percent in the first quarter of 2020. For the second quarter, we expect Canada’s gross domestic product to plunge anywhere between 15 and 30 percent from its level in late 2019. The bigger question is what happens when restrictions are lifted. In our April Monetary Policy Report, we laid out a range of plausible paths to the recovery, illustrating the high degree of uncertainty that households, businesses and policy-makers currently face (Chart 2). In a perfect world, everyone would just get back to working, living, spending and travelling—in Canada and globally—and the economy would carry on as before. In fact, we would even get an extra boost from pent-up demand. For instance, as showrooms reopen, car sales could bounce back, fuelled by a rebound in household income and low borrowing costs. We could see a similar rebound in home resales and home construction, as transactions and projects that were put on hold restart. -4Chart 2: Many paths for the economic recovery are possible Real gross domestic product (GDP), chained 2012 dollars, quarterly data $ billions 2,500 2,250 2,000 1,750 1,500 1,250 Range of scenarios Note: The dark grey shaded area refers to the 2008–09 recession. Sources: Statistics Canada and Bank of Canada calculations and projections GDP Last observation: March 2020 How close we get to this kind of best-case scenario depends on many factors. There is a risk that the domestic and global recovery could occur in fits and starts, in line with the ebb and flow of the virus and repeated loosening and tightening of containment measures in the months to come. It is also unclear how long it will take for jobs to return after containment measures are lifted. Many people have lost their jobs in the shutdown, and this is deeply concerning. There are some reasons for optimism. Layoffs are concentrated in the services sector, where during normal times labour mobility is high. That is usually indicative of lower costs of hiring workers (Chart 3). Once businesses reopen, rehiring for these jobs may be relatively fast if not hampered by high search costs and skills mismatches. The temporary nature of the layoffs coupled with supportive government programs should also make it easier for workers to find new jobs or return to the jobs they had. Chart 3: Industries most affected by COVID-19 have higher job turnover 2019 share of employed by job tenure, annual data Accommodation and food Business and support Wholesale and retail Information, culture and recreation Construction All industries 1–3 months Professional, scientific and technical Other services 4–6 months Transportation 7–12 months Forestry, fishing and mining, oil and gas Manufacturing Agriculture Health care Education Finance, insurance, real estate, rental and leasing Public administration Utilities 40 % Note: The shares represent the proportion of workers with a given job tenure as a share of employment in an industry. Job tenure is measured in months. The larger the share of short tenures, the higher the expected turnover. Last observation: 2019 Sources: Statistics Canada and Bank of Canada calculations Canada’s dependence on exports, however, complicates the recovery. Many Canadian exporters are tied into complex global supply chains. When a factory in Canada is ready to resume production, but there are still shutdowns in other parts of the world, there is a risk that customers may not yet be ready to take delivery, or that the factory may not be able to source parts in other regions. Indeed, this is what we saw during the initial phase of the outbreak, as factories around the world struggled to source components in China. Just as the effects of the pandemic have been highly asymmetric, the recovery process is expected to vary significantly across sectors and regions of the world economy. Some industries may quickly resume their growth, while others could struggle for longer (Chart 4). How an industry fares will depend on its ability to source labour and capital and on business confidence that demand will rebound. The best-positioned firms are those that were least affected by containment measures or that could offer services remotely. Industries deemed essential as well as those that offer substitute products saw high demand during the containment period. These include some health care services and social assistance, grocery stores, food manufacturers and deliveries. In contrast, industries relying on face-to-face contact with the public were hit hard. Air transport, cruises, hotels and accommodations and restaurants, for example, are suffering. Chart 4: Some sectors will be down for longer while others will suffer a substantial impact in production over time Large Potential decline of production Hotels, food and recreation Air and passenger travel Retail and wholesale trade Manufacturing Energy Construction Small Short Estimated time to recovery Long Note: Size of bubble corresponds to percentage share of Canadian output. Sources: Statistics Canada and Bank of Canada calculations For different reasons, as I mentioned earlier, the energy sector faces particular challenges. The collapse in demand for raw materials had begun even before the virus hit Canada, as the crisis took hold in China—the world’s largest commodity importer. Most commodity prices fell, but the oil market was most severely affected. While supply was relatively inflexible, demand collapsed and prices fell sharply. This was exacerbated by a price war involving Russia and Saudi Arabia. Even with a truce in that conflict, the drop in demand has meant storage capacity is nearly exhausted. For a few hours in April, one major benchmark of global oil prices turned deeply negative. These are the latest troubles for a Canadian oil and gas industry already undermined by the drop in prices that occurred six years ago and ongoing transport bottlenecks. The economic impact for Canada as a whole is mitigated by the fact that the industry makes up a smaller share of our economy now than at its peak in 2014 (Chart 5). But the pain is being deeply felt in the West. Chart 5: The oil and gas sector is now a smaller share of the economy Oil and gas nominal share in investment, exports and production % Investment Exports Sources: Statistics Canada and Bank of Canada calculations Production 2019 (estimated) Last observations: production, 2016; investment, 2018; exports, 2019 Long-lasting impacts These and other sectoral adjustments are likely to result in damage to Canada’s productive capacity that may be profound and long-lasting. Some firms may not be able to survive long with negative cash flow. Households may not be able to cope with many weeks of lost income. A lot of wealth has been lost due, in part, to the steep decline in stock markets. Both business and consumer confidence may also remain depressed, partly reflecting uncertainty related to a second wave of outbreaks. Individuals may remain reluctant to fully emerge—both physically and economically—when the containment measures are lifted. The pandemic itself could also result in structural changes in the economy. Even if the economy as a whole bounces back quickly when the shutdown is eased, some sectors may be permanently affected. For example, the pandemic could have a lasting effect on travel of all kinds and undermine long-term prospects for oil demand and prices. However, there may also be positive developments in some sectors: the COVID-19 crisis could accelerate investments in e-commerce and technologies that facilitate remote working. These changes could help some small businesses survive during the pandemic and change the retail landscape and the types of firms that are created after the pandemic ends. The pandemic could also have a long-lasting impact on global trade. Companies may rethink the vulnerability of cross-border supply chains. Protectionist policies in some countries may accelerate this reconfiguration. Based on consultations -8conducted by Bank staff, some firms expect business opportunities created through a return to domestic manufacturing to persist once the effects of the COVID-19 shock dissipate. They expect supply chains to shrink and diversify and essential health products to be produced domestically. Supply chain disruptions imply a loss of access to some markets, and consumers would likely pay more for goods and services. The experience of East Asia, where the virus first hit, provides some signs of resilience in the complex web of global supply chains. In China, the epicentre of the pandemic, strict containment measures were put in place in January and started to be lifted at the end of February. Several industries are almost back to producing at pre-containment levels. After dropping off sharply when many manufacturers were shut down, China’s exports to some of its East Asian neighbours have bounced back. But these are early days, and risks of further outbreaks of the virus remain. Moreover, near-term prospects for East Asia are dependent on the rest of the world, where much activity has yet to resume. Building the bridge to recovery Policy-makers around the world have responded to the extraordinary challenges created by this crisis. In Canada, policy action has been taken on a number of fronts. Fiscal policy has been a central part of the early effort to contain the impact of the shutdown. Several measures, such as tax payment deferrals, are aimed at giving households and businesses some breathing room. These measures play a crucial role in limiting the number of bankruptcies and knock-on effects that could arise with multiple foreclosures. This is particularly important in the current context of high household indebtedness, which could amplify the impact of the shock. Other measures provide direct support to households and businesses—for example, the Canada Emergency Response Benefit and the Canada Emergency Wage Subsidy. At the Bank of Canada, we know that a continued flow of credit is essential to build the bridge between the shutdown and the resumption of growth. If Canadians cannot pay their bills and businesses cannot service their debts, the recovery will be weak. That is why the availability of credit has been a central focus of the Bank’s policies throughout this crisis. Let me elaborate on the actions we have been taking so that households and firms can access the credit they need to get them through a period of lost income. Credit provision depends on the functioning of the set of markets that financial institutions rely on to fund their operations. When these markets operate normally, participants can buy or sell assets quickly at predictable prices, and borrowers have reliable access to financing on reasonable terms. This, in turn, allows monetary policy to be transmitted effectively to the economy. The functioning of these core funding markets was threatened by the intense financial stress that took hold in March. The sudden collapse in prices of stocks and other risky assets triggered the typical features of a financial panic. We saw a spike in volatility driven by uncertainty and a rapid fall across many asset prices. This drove a flight to safety and cash hoarding, as financial institutions -9were reluctant to lend to one another and withdrew from market making. If these forces had been left unchecked, Canadian businesses and households could have faced a severe credit crunch. Swift and aggressive policy was therefore needed to restore market functioning. Starting in mid-March, the Bank expanded its funding to financial institutions and launched various asset purchase programs, all to address problems with market functioning. Our asset purchases serve a dual purpose. First, the purchases themselves help support the functioning of the markets in which we are buying. Second, we carry out these purchases by expanding financial institutions’ deposits at the Bank of Canada, which helps satisfy the demand for additional liquidity under turbulent conditions. As a result of these operations, our balance sheet has already expanded by about $300 billion—more than tripling its size from the end of January. Details of these programs and how they work are presented in our latest Financial System Review, published on May 14. Two months on, markets are functioning noticeably better. Canadian companies have been able to increase their borrowing substantially—which is appropriate given their need to ride out their loss of revenues during the shutdown. Households likewise have been able to borrow more, partly reflecting the fact that some mortgage payments have been postponed. While these are encouraging signs, new challenges are in store. In particular, we are seeing a sizable increase in financing needs by federal and provincial governments, coinciding with the heightened credit needs of the private sector. In response, we have temporarily stepped up our purchases of federal government debt and launched new facilities for purchasing provincial and corporate debt. This is so that these markets continue to function so that borrowers can continue to access the credit they need to get through this difficult period. Managing risks to inflation This brings me to the direction of monetary policy. For over 25 years now, the Bank of Canada’s monetary policy has been guided by our 2 percent inflation target. This period has included some turbulent times, and inflation has nonetheless averaged close to that target. Inflation was near 2 percent before the global shutdown started, and the economy was operating close to potential. The inflation target remains our objective, and in the period ahead we will continue to manage the risk that inflation could persistently diverge from target in either direction. Typically, that means lowering our policy interest rate to stimulate demand when economic slack is putting downward pressure on inflation and raising that rate when we see excess demand emerging. But the shutdown is not typical. The most recent data indicate that inflation has declined sharply. But that is due less to overall economic slack than to some specific factors—especially the drop in prices of gasoline and travel services, as well as shifts in spending. These shifts mean that the standard consumer price index (CPI), based on the cost of a fixed basket of goods, is less meaningful. While many of these changes will reverse when businesses reopen, we expect to see some persistent price effects, which will differ across products and services. - 10 We will also likely see some further changes in consumption patterns. These will affect the true underlying price pressures throughout the crisis and recovery period. During that adjustment, official inflation measures might be less informative than usual about capacity pressures. At the Bank, we are working to assess the impact that these shifts in spending patterns can have on measured inflation. During the shutdown, consumers have cut their spending on goods such as food away from home, airfare, clothing and gasoline and on services such as haircuts. On the flip side, the share of food purchased in stores and pharmaceutical products has risen sharply. Overall, the results indicate that the decline in inflation experienced by consumers may be less than indicated by the official CPI measure. Moreover, stimulating demand cannot do much to influence inflation as long as the stores, and indeed much of the economy, remain closed. In this setting, monetary policy needs to be even more forward looking than usual, seeing beyond the shutdown to its potential implications for the subsequent recovery. The loss of household wealth coupled with self-reinforcing weakness in business and consumer confidence could continue to weigh on aggregate demand after the restrictions are lifted. Some businesses will fail, and workers will not regain their old jobs. Supply chains, both in Canada and globally, may be disrupted for some time. While the steps we have taken should help, we are likely to emerge from the shutdown with both demand and supply weaker than before. The scarring associated with the shutdown could lower productivity, which tends to result in higher inflation. But the Bank’s analysis suggests that the decline in demand stemming in part from weaker business and consumer confidence is likely to have a larger effect. On balance, there is likely to be downward pressure on inflation. As restrictions are lifted, monetary policy will continue to manage the risk that inflation could deviate persistently from its target in either direction. Based on our assessment that downward pressure on inflation is more likely, we have already cut our policy rate by 1½ percentage points to its effective lower bound of ¼ percent. We are also continuing with market operations aimed at transmitting the policy rate effectively to the real economy. We can adjust these operations as needed to head off a move of inflation in either direction from the target. Conclusion Just as I began with a description of these extraordinary times, I must conclude with the same sentiment—this is an unparalleled time in history, and it is hard to gauge the right action. But we knew from the outset that paralysis was not an option: now is not the time for precision, but decision. To be sure, fiscal policy must do a lot of the heavy lifting, and the Canadian government has taken decisive steps. That’s appropriate: elected representatives are the ones to make those decisions. Fiscal measures can target sectors and groups most affected by crisis. At the same time, monetary policy works in an independent and complementary way by influencing financing conditions for the whole economy, - 11 and generally tries to be neutral in its impact. As such, the Bank of Canada will do our part to help Canadians get through this period and build the foundation needed to steer the economy back on track.
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Text of the Eric J. Hanson Memorial Lecture by Mr Stephen S Poloz, Governor of the Bank of Canada, University of Alberta, Edmonton, Alberta, 25 May 2020.
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Remarks by Stephen S. Poloz Governor of the Bank of Canada Eric J. Hanson Memorial Lecture University of Alberta May 25, 2020 Edmonton, AB Monetary policy in unknowable times Introduction It is an honour for me to deliver the Eric J. Hanson Memorial Lecture for 2020. I want to thank the University of Alberta for the invitation and for your flexibility and perseverance in these difficult and unusual times. Eric Hanson was a great economist and Albertan whose pioneering work on public finance helped define the Canada we know today. The lecture series established in his memory has seen contributions from some very important names in Canadian economics and public policy, such as Thomas Kierans, Judith Maxwell and Kevin Lynch, to name just a few. The Bank of Canada has been involved with this lecture series almost from the beginning. I was working at the Bank in 1988 when then-Governor John Crow delivered the second-ever Hanson Lecture. Crow cemented the idea that price stability should be the prime mission for the central bank because it is the best contribution monetary policy can make to our economic well-being. That lecture laid the foundation for inflation targeting—the highly successful monetary policy framework now practised in Canada and virtually every advanced economy. David Dodge would follow John Crow 20 years later, at a time when the global economy was poised on the edge of crisis. Dodge questioned whether inflation targeting really did represent the end of monetary policy history, despite the Bank of Canada’s success in meeting its objectives. As Dodge rightly pointed out, our knowledge remains very limited, and monetary policy-makers should always approach their task with humility and crossed fingers. Five years later, Mark Carney would be the third Bank of Canada Governor to take this stage, discussing the lessons policy-makers learned from the 2008–09 global financial crisis—including the need to understand how monetary policy interacts with other macroeconomic policies. I am grateful for the opportunity to join this distinguished list. When the possibility of delivering this lecture first arose last year, I knew that I wanted to talk about uncertainty as it relates to the conduct of monetary policy. After all, the past seven years have been marked by several major events that have forced policymakers to confront unprecedented uncertainty—unprecedented in both I would like to thank Sharon Kozicki and Paul Badertscher for their invaluable collaboration in preparing this lecture. Not for publication before May 25, 2020 13:30 Eastern Time -2magnitude and origin. Economists, including many at the Bank of Canada, have responded by developing ways to think about and formally incorporate these uncertainties into the conduct of monetary policy. Given that I have been part of this history, I thought I could put the bow on my time as Governor by going to Edmonton and talking to a knowledgeable and engaged audience about uncertainty and monetary policy. Then came the global tragedy we know as COVID-19. The clear imperatives for authorities around the world were to flatten the curve of infections, try to keep health-care systems from becoming overwhelmed and minimize preventable deaths. This led to severe but necessary restrictions on the movement of people and the shuttering of large sections of the economy. Policy-makers tried to cushion the blow through economic policies of historic size and scope, put in place for an undetermined length of time. Clearly, this is uncertainty in the extreme. Today, there are encouraging signs in Canada that efforts to flatten the pandemic curve are paying off, and jurisdictions are taking tentative steps toward relaxing containment measures. But it is safe to say that the policy-makers who will guide us to whatever “normal” turns out to be will be dealing with unparalleled uncertainty. They will have to deal with all the unknowns surrounding the restart of shuttered sectors, the reconstruction of broken value chains, the unwinding of emergency measures and the unpredictable behaviour of consumers and business leaders. Some of the financial vulnerabilities already present in the economy will have grown worse, and other sources of vulnerability are likely to emerge. We are truly entering unknowable times. Obviously, the context has shifted dramatically since I first started thinking about this lecture, but that has made the topic even more fitting. I will review how monetary policy practitioners have dealt with uncertainty in the past and how that has changed, particularly since the global financial crisis. Specifically, I will illustrate how a risk management approach to monetary policy has been developed over time, by describing case studies from my tenure at the Bank and referring to supporting research along the way. Finally, I will offer some early thoughts on how the lessons of the recent past will be applied as policy-makers face massive uncertainty in the months and years ahead. Dealing with uncertainty: an evolution Uncertainty has always been a key part of practical economics and policy making, and a large body of academic literature has developed over the years to provide guidance on how to make policy under uncertainty. Much of the literature builds on the thinking of American economist Frank Knight, who a century ago came up with a way to classify the things economists don’t know about.1 Knight used the word “risk” for situations where it is possible to calculate the probability of various outcomes. The term “Knightian uncertainty” came to refer to situations where calculating the odds is impossible. In reality, most situations fall F. H. Knight, Risk, Uncertainty and Profit (Boston, MA: Hart, Schaffner & Marx; Houghton Mifflin Co., 1921). -3somewhere between these two extremes, but the notion of Knightian uncertainty remains pertinent today. The means by which policy-makers account for and respond to uncertainty has evolved over time, as have the types of uncertainty they have faced in making decisions.2 Consider all the uncertainties involved in using economic models— the indispensable tools for practitioners of monetary policy. The Bank of Canada is an inflation-targeting central bank. We know that our policy actions can only affect inflation in the future, after a lag that reflects all the complexity of the monetary policy transmission process. This means it is crucial that we have a deep understanding of the economy to guide our policy decisions. We have developed increasingly sophisticated economic models to help inform our decisions. Their predictive power comes from the various linkages between the variables in those models. These interdependencies represent our best understanding of the structure of the economy—a coherent view of how all the pieces fit together. While these interdependencies make the model a powerful tool for the policymaker, they can also be its Achilles heel. This is because a systematic error in just one component of the model can affect how it projects many variables. Consequently, from the earliest use of forecast models, policy-makers have had to take into account “model uncertainty,” whether associated with parameters or specification. Model parameters are not predetermined and may change over time, which inserts uncertainty into the model outputs and implied policy recommendations. Besides, uncertainty about model specification—which is to say, the basic ingredients of the model—reflects the fact that there is much we do not know about the fundamental structure of the economy.3 Simply put, all models are simplifications of the real world. Because policy-makers today rely on models to develop coherent economic forecasts and policy decisions, it follows that a certain amount of uncertainty must be incorporated into the decisionmaking process. The possible sources of uncertainty do not stop there. Policy-makers must also be aware of measurement error, which arises because many key concepts for monetary policy—such as potential output—are unknown and must be estimated. Measurement error also applies to the underlying data, which are subject to revision. A scan of the economics literature reveals several other forms of uncertainty that are pertinent to the policy-maker. These include mandate uncertainty, which can affect economic performance when consumers and businesses are unsure about the central bank’s policy objectives. Mandate uncertainty has decreased in Canada since the early 1990s, when the Bank and federal government first spelled out an agreement on a framework for inflation targeting containing an Mendes, Murchison and Wilkins summarize and compare the main results that have emerged in the literature on optimal monetary policy under uncertainty with actual central bank behaviour in R. R. Mendes, S. Murchison and C. A. Wilkins, “Monetary Policy Under Uncertainty: Practice Versus Theory,” Bank of Canada Staff Discussion Paper No. 2017-13 (November 2017). An important aspect of model uncertainty relates to how households and firms in the model form expectations. -4explicit objective for inflation. The statement of the central bank’s policy framework in 1991 was followed by several moves to increase transparency. These began under the leadership of Governor Gordon Thiessen and continued through the work of Governors David Dodge and Mark Carney.4 As transparency increased and the Bank developed a reputation for achieving its inflation targets, we earned credibility and mandate uncertainty was essentially eliminated. Since 1995, we have regularly published the Monetary Policy Report (MPR), which provides a thorough update of the Bank’s economic outlook. Since 2009, each MPR has had a separate section spelling out what we see as the main risks to the outlook. Before 2000, interest rate announcements took place only when the rate was changing, and you can imagine the anticipation and angst that was often present in financial markets. Since 2000, some of that uncertainty has been removed, as we have established fixed announcement dates (FADs) for our policy interest rate announcements. At each FAD we issue a press release that explains our economic outlook and any changes since the previous FAD, identifies uncertainties clouding the outlook and reinforces market understanding of the Bank’s reaction function. In 2013, we started including Governing Council’s assessment of the risks directly in the press release, in part to emphasize our risk management process. There is much more to the Bank’s efforts to increase transparency, so the topic of communications will be an important thread in this lecture. For now, let me just say that clear and transparent communications are vital for monetary policy. We recognize that policy is more effective, and the economy works better, when the central bank is clear about its target and the reaction function that helps it achieve the target. Clear communication improves decision making throughout the economy by reducing various sources of uncertainty, including mandate uncertainty. The usual practice for policy-makers is to see how well their models forecast economic developments and figure out the cause of any errors. Often, the errors can be considered benign white noise generated by various sources of uncertainty. However, when the data consistently show results that are different from what the model projects, it could be a sign that something more important is at play. Because of all the interdependencies, we have to guard against the possibility of persistent problems with the model, which can lead to a biased projection and monetary policy errors. The problem with this common practice was revealed during the global financial crisis and subsequent Great Recession. The events illustrated a key weakness in most macroeconomic policy models at the time. In particular, they captured fewer and less-detailed linkages between financial markets and the real economy than ideal. They also revealed the need for the profession to work toward the goal of Kozicki and Vardy and the references therein outline ways in which the Bank of Canada seeks to explain its economic outlook and monetary policy decisions, with an emphasis on how different sources of uncertainty factor into monetary policy communications. See S. Kozicki and J. Vardy, “Communicating Uncertainty in Monetary Policy,” Bank of Canada Staff Discussion Paper No. 2017-14 (November 2017). -5having a grand, unified model that adequately captures both macroeconomic and financial sector risks.5 In addition to illustrating the limitations of our models, the global financial crisis and Great Recession heralded the start of a series of shocks that have emanated from events beyond our borders and beyond our control. These kinds of shocks often cannot be easily modelled—they are examples of Knightian uncertainty. Today, the obvious example is the shock associated with the pandemic and the global policy response. Before this year, I would have illustrated this type of Knightian uncertainty by talking about global trade policy, as we had witnessed the emergence of trade wars that threatened to change the global trading system. The associated business uncertainty became a factor that on its own weighed on economic growth by dampening business confidence, investment and exports.6 Forecasting the size and duration of the impact of this uncertainty, particularly given the on-again, off-again nature of trade talks and the unpredictable nature of the protagonists, required an enormous amount of judgment by policy-makers. The development of a risk management approach In 2013, when I returned to the Bank, it was obvious that the Canadian and global economies were dealing with many uncertainties and risks that lay outside the scope of our main monetary policy models of the time. This represented a clear challenge for our monetary policy. During my first year as Governor, I delivered a speech that spelled out the importance of risk management to monetary policy.7 I also offered some early thoughts about risk management in a paper I delivered to the Canadian Association for Business Economics in 2014.8 Moving monetary policy from the theoretical, or formulaic, space into a problem of risk management acknowledges and accepts the uncertainties inherent in An early contribution in this direction built additional financial system detail into a small open-economy macroeconomic model and included various macroprudential policy levers. See S. Alpanda, G. Cateau and C. Meh, “A Policy Model to Analyze Macroprudential Regulations and Monetary Policy,” Canadian Journal of Economics 51, no. 3 (August 2018): 828–863. Potential trade-offs faced by monetary policy were addressed by M. Shukayev and A. Ueberfeldt, “Monetary Policy Trade-offs between Financial Stability and Price Stability,” Canadian Journal of Economics 51, no. 3 (August 2018): 901–945. In addition, Bank research has examined the effectiveness of macroprudential and monetary policies to address vulnerabilities. See, for example, S. Alpanda and S. Zubairy, “Addressing Household Indebtedness: Monetary, Fiscal or Macroprudential Policy?” European Economic Review 92 (February 2017): 47–73. Bank staff analyses that relate elevated uncertainty of various types to weaker economic activity include S. Jo, “The Effects of Oil Price Uncertainty on Global Real Economic Activity,” Journal of Money, Credit and Banking 46, no. 6 (September 2014): 1113–1135; S. J. Byun and S. Jo, “Heterogeneity in the Dynamic Effects of Uncertainty on Investment,” Canadian Journal of Economics 51, no.1 (February 2018): 127–155; L. Ferrara and P. Guérin, “What Are the Macroeconomic Effects of High-Frequency Uncertainty Shocks,” Journal of Applied Econometrics 33, no.5 (August 2018): 662–679; R. Sekkel and S. Jo, “Macroeconomic Uncertainty Through the Lens of Professional Forecasters,” Journal of Business & Economic Statistics 37, no. 3 (2017): 436–446. S. S. Poloz, “Monetary Policy as Risk Management” (speech to the Canadian Club of Montréal, Montréal, December 12, 2013). S. S. Poloz, “Integrating Uncertainty and Monetary Policy-Making: A Practitioner’s Perspective,” Bank of Canada Staff Discussion Paper No. 2014-6 (October 2014). -6policy making. This does not mean rejecting the use of models in decision making. In fact, the Bank’s various models provide the base case that serves as the starting point for Governing Council’s deliberations. They are also used to simulate alternative scenarios, which is an excellent means of reaching a fuller understanding of the risks we face.9 The essence of risk management is identifying the most important risks and uncertainties around the outlook. We examine the probabilities that the risks will be realized, consider alternative futures related to uncertainties and think about the potential consequences of making a policy error. We then choose a policy course that weighs these risks and uncertainties in order to best manage them. This process can entail a degree of flexibility around the inflation target itself, allowing inflation to return to target more slowly or quickly than on average, while keeping in mind that our target sits within a control range of 1–3 percent. Given all the uncertainties and risks, it does not make sense to think a single, optimal path for our policy interest rate will be consistent with achieving our inflation target. It makes no sense to try to engineer such a path with precision. Instead, we recognize that for every base-case economic projection, a wide range of possible interest rate paths could ultimately be broadly consistent with the inflation target. We weigh the various risks associated with things we do not know and then take actions that are based on a nuanced balancing of those risks.10 In doing so, we often use several smaller, specialized models to augment the input from our main projection models, look at anecdotal and survey evidence and apply considerable judgment. Notice that balancing the risks we face also requires taking into account the starting point for the economy, inflation and interest rates. Consider a situation where inflation is below target, as was often the case in the wake of the Great Recession. With the right monetary policy, an economic model will project a path for inflation that gradually rises toward the target. A forecaster might look at the projection and see that the risks to the inflation projection appear to be statistically balanced. In other words, inflation is just as likely to end up below that path as above it. But the policy-maker may have a different view. If the starting point for inflation is already below the target, any random shock that drives inflation even further below target would be worse from a policy-maker’s perspective than a shock that pushes inflation up toward the target. So, even if statistical risks to the projected inflation path are roughly balanced, the risks in terms of inflation outcomes may be skewed in the policy-maker’s eyes. And, the closer the policy rate is to its effective lower bound, the more skewed this risk becomes. So, when the starting Some of these alternative scenarios have been published in Bank of Canada staff analytical notes: R. Barnett and R. Mendes, “A Structural Interpretation of the Recent Weakness in Business Investment,” Bank of Canada Staff Analytical Note No. 2017-7 (July 2017); J. Yang, B. Tomlin and O. Gervais, “Alternative Scenario to the October 2017 MPR Base-Case Projection: Higher Potential Growth,” Bank of Canada Staff Analytical Note No. 2017-18 (October 2017); K. B. Charbonneau, “The Impact of a Trade War: Assessment of the Current Tariffs and Alternative Scenarios,” Bank of Canada Staff Analytical Note No. 2019-20 (July 2019). See the discussion of the Bank’s risk management approach to monetary policy in Bank of Canada, Renewal of the Inflation-Control Target: Background Information—October 2016 (Ottawa: Bank of Canada, 2016). -7point for inflation is low, the policy-maker would be more concerned about downside risk to inflation than upside risk and would rebalance the risks, keeping monetary policy more stimulative than the model and the forecaster would recommend. The application of risk management becomes particularly important as a wider array of risks enter into policy deliberations. In the aftermath of the global financial crisis, the economy took a long time to return to full capacity and inflation loitered below target. As a result, interest rates remained low for longer than expected, driving an increase in borrowing that showed up in household and housing sector vulnerabilities. Elevated financial vulnerabilities can change how interest rates affect the economy, adding even more uncertainty into our models.11 For instance, at high levels of household indebtedness, a reduction in interest rates may not provide as much economic stimulus as when debt levels are low. The main reason for this is that fewer households would likely be interested or able to take on additional debt. In contrast, the restraining effect of interest rate increases could be larger, both relative to history and relative to the impact of a similar-sized interest rate reduction.12 This is because interest rate changes affect disposable income, and highly leveraged borrowers might save a large proportion of increases in disposable income but cut their consumption steeply when their disposable income declines.13 Financial vulnerabilities are also important because they can affect the “time trade-off” for economic growth. Specifically, a reduction in interest rates today will boost near-term economic growth through greater borrowing. Greater borrowing increases financial vulnerabilities, which in turn increase the risk that a future negative shock will have a magnified effect on the economy. This leads to much slower economic growth and makes the inflation target more difficult to achieve. In short, by acting aggressively to achieve its inflation target today, the Bank can make it harder to achieve its target in the future. The effect is to trade faster growth today for slower growth in the future. The Bank is working on new tools to help evaluate this time trade-off. We use “growth-at-risk” models to capture the downward asymmetry in the distribution of growth associated with elevated levels of household indebtedness.14 All this to say that financial vulnerabilities and the risks they pose for future growth and inflation have earned a place at the table as the Bank considers its policy options. Let me emphasize, however, that the Bank’s inflation target remains the overarching goal—the prime mission of our monetary policy. See, for example, T. Duprey, “Asymmetric Risks to the Economic Outlook Arising from Financial System Vulnerabilities,” Bank of Canada Staff Analytical Note No. 2018-6 (March 2018). The destabilizing effects of tightening in the short term are examined in G. H. Bauer and E. Granziera, “Monetary Policy, Private Debt, and Financial Stability Risks,” International Journal of Central Banking 13, no. 3 (2017): 337–373. In 2017, the Terms of Trade Economic Model (ToTEM) was revised to have improved modelling of household debt and a more-detailed modelling of the housing market. See Bank of Canada, “Appendix: Recent Changes to ToTEM,” Monetary Policy Report (October 2017): 24–25. For more details on growth at risk, see T. Duprey and A. Ueberfeldt, “How to Manage Macroeconomic and Financial Stability Risks: A New Framework,” Bank of Canada Staff Analytical Note No. 2018-11 (May 2018); and T. Duprey and A. Ueberfeldt, “Managing GDP Tail Risk,” Bank of Canada Staff Working Paper No. 2020-03 (January 2020). -8Financial stability issues are generally not a significant constraint on monetary policy actions. However, our policy framework does give us flexibility in the time it takes to get inflation back to target, which allows us to make tactical decisions to avoid unintentionally making financial stability concerns worse. This can all seem vague and judgmental to those who would prefer a more formulaic approach to monetary policy: inflation rises, interest rates rise, inflation falls. Unfortunately, the world is really not that simple. First, because monetary policy acts with a lag, we are always aiming to achieve our inflation goal in the future, offsetting invisible shocks that threaten to move us away from target. Therefore, a perfectly executed monetary policy would see interest rates moving in anticipation of the consequences of recent shocks and inflation remaining on target the whole time. In effect, the more effective monetary policy is, the more difficult it may be to explain. Second, weighing one uncertain, complex risk against another is inherently judgmental and not amenable to mechanical or formulaic decision making. The Governing Council’s consensus approach to decision making, coupled with enhanced transparency around the judgments made about the risks, shows its strength in this regard. Before moving on, let me stress that taking a risk management approach to monetary policy is not a uniquely Canadian practice. The Chair of the US Federal Reserve, Jerome Powell, describes the Fed’s approach to policy as having “three important parts: monitoring risks; balancing risks, both upside and downside; and contingency planning for surprises.”15 Possibly a better description of risk management would be to call it a “common sense approach,” since it reflects reality rather than the elegance of economic theories. Over the years, we at the Bank have increasingly viewed monetary policy through a risk-management lens. And this has led to a wide variety of changes in processes and procedures and has sparked many key avenues of research. What I’d like to do now is go through two case studies from the past seven years, show how risk management applied to each situation and talk about changes in our processes that emerged. Then, I will turn to monetary policy and the unknowable implications of the pandemic. Case study 1: the oil price shock of 2014–15 Let us look back at the oil price shock of 2014–15. In 2014, amid signs of improving business investment and exports, real gross domestic product was expanding at a rate above its estimated potential. Core inflation rose through the year to around 2 percent. Following a prolonged period of low interest rates, household spending was robust, and Canada continued to experience rising prices in key housing markets and increasing risks from elevated levels of household indebtedness. Against this backdrop, West Texas Intermediate oil prices fell by roughly half, from a peak of more than US$100 per barrel near the end of the second quarter to about US$50. By the last quarter of 2014, the marked decline in global oil prices posed a significant downside risk to the Canadian economy and inflation. J. H. Powell, “Monetary Policy and Risk Management at a Time of Low Inflation and Low Unemployment” (remarks delivered at the “Revolution or Evolution? Reexamining Economic Paradigms” 60th Annual Meeting of the National Association for Business Economics, Boston, MA, October 2, 2018). -9At the same time, an important upside risk was the possibility of a more robust recovery in the United States. Finally, a key two-sided risk was the possibility of greater-than-expected strength in housing and consumption, which would boost Canadian economic growth while increasing the likelihood and potential severity of a correction later on. All of this presented a complex mix of risks to weigh. Through 2014, we judged that the risks to our inflation projection were roughly balanced, while the financial stability risks associated with household imbalances continued to edge higher. Overall, the balance of risks was such that we felt the prevailing setting of the policy interest rate was appropriate to keep inflation aimed at our 2 percent target. But by January 2015, it became clear that low oil prices would endure, that the energy industry would be making major markdowns to their investment plans and that Canada would need to adjust to a significant drop in its terms of trade. The decline posed a sufficiently large downside risk to our inflation outlook to warrant a reduction in the policy interest rate. We cut rates again in July, bringing our policy rate to 0.5 percent, as the persistence and impact of the shock became clearer. Note that throughout this episode, financial vulnerabilities associated with elevated levels of household debt and rising house prices could have motivated higher interest rates, while projections of declining inflation would have favoured lower interest rates. In other words, financial stability risks were working at cross purposes from macroeconomic risks; cutting interest rates would reduce macroeconomic risks but increase financial stability risks at the same time. But the oil price decline ultimately proved to be sufficiently large that it materially shifted the balance of risks and led the Bank to lower the policy interest rate in support of its primary mission. Risk management considerations helped inform our decisions in several ways throughout this episode. To begin with, Governing Council was receiving input from multiple macroeconomic models, each with its own strengths and perspectives. The Bank was using ToTEM—the Terms of Trade Economic Model—a state-of-the-art dynamic stochastic general equilibrium model.16 ToTEM anticipated how serious the oil price shock would be, how the effects would persist and how the economy would adjust to lower oil prices.17 But we For additional details on ToTEM, see S. Murchison and A. Rennison, “ToTEM: The Bank of Canada’s New Quarterly Projection Model,” Bank of Canada Technical Report No. 97 (December 2006); J. Dorich, R. R. Mendes and Y. Zhang, “Introducing Multiple Interest Rates in ToTEM,” Bank of Canada Review (Summer 2011): 3–10; J. Dorich, M. K. Johnston, R. R. Mendes, S. Murchison and Y. Zhang, “ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model,” Bank of Canada Technical Report No. 100 (October 2013). An estimate of the impact of the lower oil prices without a monetary policy response was provided in Bank of Canada, “Appendix: The Impact of Lower Oil Prices on the Canadian Economy,” Monetary Policy Report (January 2015): 25–26. - 10 were able to cross-check ToTEM’s advice with LENS—the Large Empirical and Semi-structural model.18 Using multiple models for projections is a hallmark of risk management. In fact, the Bank was already using ToTEM and LENS by 2013 as we worked to understand a series of surprisingly weak export data. The Bank also developed other models for exports to inform that part of the projection.19 We always strive for transparency about the development and use of our models. We summarize new analysis in MPRs and publish related staff analytical notes, staff discussion papers and technical reports. Another feature of risk management I can highlight is the use of so-called soft data to inform our process. Our decision to lower interest rates was influenced by conversations with businesses in the oil sector. There would not be a lot of hard data on Canadian investment intentions until well after the fact. But through our Business Outlook Survey, as well as through personal conversations with oil industry executives, we were able to estimate in a timely way the scale of future reductions in business investment.20 The oil price shock also coincided with an important communications advance for the Bank. I am referring to the opening statements that either the Governor or Senior Deputy Governor give at the start of the press conference that follows publication of an MPR. The usual practice had been to use the opening statement simply to restate the key points of the FAD press release and takeaways from the MPR, or even to read the press release verbatim. By the time of the January 2015 MPR, we had decided to make the opening statement a vehicle for elaborating on the key issues in Governing Council’s deliberations. The statement thus serves the same purpose as minutes of the deliberations of other central banks and does so in a way that is more timely and often more concise and efficient. While the change to the format of the opening statement was an advance in transparency, our moves to lower interest rates in 2015 sparked some complaints from financial market participants. They felt we had not been sufficiently transparent with our intention to lower our policy rate before acting. This reaction was seen by some as a natural consequence of our decision in 2013 to stop giving routine guidance about the future path of interest rates in our FAD press releases. To be clear, I’m referring to general statements about the O. Gervais and M.-A. Gosselin, “Analyzing and Forecasting the Canadian Economy through the LENS Model,” Bank of Canada Technical Report No. 102 (July 2014). New tools that were developed to inform export projections are described in R. Barnett, K. B. Charbonneau, G. Poulin-Bellisle, “A New Measure of the Canadian Effective Exchange Rate,” Bank of Canada Staff Discussion Paper No. 2016-1 (January 2016); P. Alexander, J.-P. Cayen and A. Proulx, “An Improved Equation for Predicting Canadian Non-Commodity Exports,” Bank of Canada Staff Discussion Paper No. 2017-1 (January 2017); and A. Binette, T. Chernis and D. de Munnik, “Global Real Activity for Canadian Exports: GRACE,” Bank of Canada Staff Discussion Paper No. 2017-2 (January 2017). See, for example, Bank of Canada, “Box 1: Investment in the Oil and Gas Sector: An Industry Perspective,” Monetary Policy Report (January 2015): 17. - 11 future direction of interest rates, not specific commitments about monetary policy that form part of the Bank’s policy tool kit for extraordinary times. Offering routine forward guidance about the future path of interest rates obviously makes it easier for financial market participants to predict our policy. It can be argued that it makes markets more efficient because it reduces uncertainty. However, it does not reduce the total amount of uncertainty. Uncertainty is simply shifted onto the central bank’s shoulders. When we decided to stop giving guidance, it was at a time when we could not fully explain why exports and business investment were weaker than our economic models were projecting.21 We wanted markets to appreciate the uncertainty we were facing and were concerned that providing forward guidance was giving participants a false sense of certainty. By being honest about the extent of our uncertainty, and by not offering false certainty, we managed to shift some of the uncertainty off our plate and put it back into markets. This is a positive and important development because routine guidance also comes with a cost—it suppresses the natural signalling role of financial markets. When market participants pay attention only to the words we say about future policy and begin to discount the flow of actual economic data, they set up a oneway bet in markets.22 Market prices cease acting as a check for our own projections. Bank research suggests that this can also lead to inefficient capital flows.23 It is normal that there will be times when market views about the future of the economy and interest rates, and those of the central bank, do not align. Indeed, normal market function depends on there being a variety of views about the economy. The central bank should not try to force alignment of market views with our own. Instead, we should be helping markets understand the thinking behind our policy decisions. For financial market participants and the public to understand the nuances involved in risk management, we need to communicate our assessment of the events and issues that are influencing our decisions, while being honest about the high level of uncertainty inherent in policy making. The discussion of uncertainty is particularly important when a large shock—such as the collapse in oil prices—hits the economy and must be considered in the outlook, as it was Several studies that subsequently contributed to the Bank’s understanding of the drivers of export weakness include A. Binette, D. de Munnik and E. Gouin-Bonenfant, “Canadian Non-Energy Exports: Past Performance and Future Prospects,” Bank of Canada Staff Discussion Paper No. 2014-1 (April 2014); M. Coiteux, P. Rizzetto, L. Suchanek and J. Voll, “Why Do Canadian Firms Invest and Operate Abroad? Implications for Canadian Exports,” Bank of Canada Staff Discussion Paper No. 2014-7 (December 2014); and A. Binette, D. de Munnik and J. Melanson, “An Update—Canadian Non-Energy Exports: Past Performance and Future Prospects,” Bank of Canada Staff Discussion Paper No. 2015-10 (October 2015). Sensitivity of financial markets to central bank policy statements is examined by M. Ehrmann and J. Talmi, “Starting from a Blank Page? Semantic Similarity in Central Bank Communication and Market Volatility,” Journal of Monetary Economics 111 (May 2020): 48–62. The analysis in Ghironi and Ozhan suggests that if monetary policy artificially suppresses near-term uncertainty about the policy rate then it would encourage inefficient capital flows. See F. Ghironi and G. K. Ozhan, “Interest Rate Uncertainty as a Policy Tool,” Bank of Canada Staff Working Paper No. 2020-13 (April 2020). - 12 during this episode. This requires as much transparency as we can give without resorting to false precision about the outlook and the future path for the policy interest rate. Case study 2: policy normalization amid growing uncertainty in 2017–18 Let us now skip ahead a couple of years to 2017–18 and look at how risk management shaped our actions as we set out to bring our policy interest rate back to more normal levels. By mid-2017, the national economy had largely recovered from the oil price shock of 2014–15, although weakness remained in some regions. Still, growth was broadening across sectors, and the output gap was expected to close by the end of 2017. Inflation was rising, although it remained below 2 percent. In this context, we raised the policy interest rate in July 2017, two years after we had lowered it to 0.5 percent. In all, we would tighten policy by 125 basis points by the end of 2018. In reviewing this period, I will note several important considerations from a risk management perspective and some key contrasts from the previous case study. The first consideration is that during this period, both the macroeconomic environment and the financial vulnerabilities associated with elevated household indebtedness and house prices favoured higher interest rates. Unlike the previous period, monetary policy and financial stability concerns were now pointing in the same direction. Another key difference from the previous case study is the role played by macroprudential policies. Canada announced two rounds of changes to mortgage-lending guidelines that would broaden the scope of stress testing of new mortgage borrowers. This policy was designed to improve the quality of new lending to contain vulnerabilities associated with household indebtedness. This had a direct impact on the macroeconomy—it considerably reduced the level of housing activity when the second round became effective in 2018. More importantly, this policy combined with increased housing-related taxes in some municipalities and provinces to contribute to a large decline in speculative activity and a reduction of froth in house price expectations that had been prevalent in some regions.24 With less-risky mortgages being added to the stock of household debt, the economy’s vulnerability was becoming contained.25 And with these macroprudential policies in place, the time trade-off was altered: we could increase the weight on risks associated with achieving the inflation target and reduce the weight on risks associated with household vulnerabilities. A third important difference from the first case study is the introduction of increasing amounts of Knightian uncertainty linked to global trade policy. M. Khan and M. Verstraete, “Personal Experiences and House Price Expectations: Evidence from the Canadian Survey of Consumer Expectations,” Bank of Canada Staff Analytical Note No. 2018-8 (April 2018); M. Khan and M. Verstraete, “Non-Resident Taxes and the Role of House Price Expectations,” Bank of Canada Staff Analytical Note No. 2019-8 (March 2019); M. Khan and T. Webley, “Disentangling the Factors Driving Housing Resales,” Bank of Canada Staff Analytical Note No. 2019-12 (April 2019). O. Bilyk and M. teNyenhuis, “The Impact of Recent Policy Changes on the Canadian Mortgage Market,” Bank of Canada Staff Analytical Note No. 2018-35 (November 2018). - 13 Beginning with the Brexit vote in 2016, rising populism had led to large shifts in government priorities in some countries, which was showing up as vows to overhaul trade relationships. Without knowledge about what future trade arrangements might look like, uncertainty was elevated and rising as geopolitical tensions broadened and trade tensions became trade conflicts. Two fronts in the trade wars were particularly relevant for Canada—the China–US conflict and the renegotiation of trade arrangements between Canada, the United States and Mexico.26 When a source of Knightian uncertainty arises, the Bank must decide how to handle it within the base-case scenario and explain how (or whether) it has taken this uncertainty into account. The Bank of Canada provided base-case economic projections under assumptions about trade arrangements over the projection horizon. But to help explain how Governing Council thought about and weighed the risks, the Bank’s MPRs supplemented the base cases. The MPRs described the various channels through which economic activity could be affected by abrupt changes in trade policies and in the level of policy-related uncertainty. Trade policy uncertainty was two-sided. Because the uncertainty itself was weighing on demand, agreement on future trade arrangements between regions could reduce the drag on economic activity, providing an upside risk to growth. However, if negotiations were to deteriorate or be resolved in a way that would obstruct trade, economic activity would likely be worse than in the base case, providing a downside risk to growth. Another key part of our deliberations from a risk management point of view was the extent to which strong growth could continue, even in the context of a closed output gap, in order to absorb excess labour capacity and possibly also contribute to a stronger-than-expected increase in supply. Traditional measures of the output gap suggested that the economy was approaching its capacity limits or possibly operating above them. Yet, we were not seeing signs of inflation pressures. With inflation below target for some time and wage growth subdued, we judged that the risk of a small temporary overshoot of inflation was outweighed by the risk that strong demand could lead to persistently higher potential output. We were aware that the effects of digitalization were probably adding to economic growth in ways that were not being adequately measured.27 Further, the labour market was evolving in a way that was increasing labour force participation, mainly through part-time or “gig” occupations.28 All this suggested that there was scope for more gradualism in raising the policy interest rate relative to historical Simulations were used to estimate the economic impact on the United States and other countries of tariff changes applied and proposed by the United States in K. B. Charbonneau and A. Landry, “Estimating the Impacts of Tariff Changes: Two Illustrative Scenarios,” Bank of Canada Staff Analytical Note No. 201829 (September 2018); and K. B. Charbonneau and A. Landry, “The Trade War in Numbers,” Bank of Canada Staff Working Paper No. 2018-57 (November 2018). C. D’Souza and D. Williams, “The Digital Economy,” Bank of Canada Review (Spring 2017): 5–18. O. Kostyshyna and C. Luu, “The Size and Characteristics of Informal (‘Gig’) Work in Canada,” Bank of Canada Staff Analytical Note No 2019-6 (February 2019), show that informal “gig” work may have been contributing to reduce wage pressures. - 14 experience, despite the low level of the policy rate and domestic economic strength. Our ability to follow a risk management approach was aided by a couple of advances in communication. By late 2016, we had augmented the risks section of our MPRs to give more information on developments related to risks—both what had happened since the previous MPR and what was going to be monitored in the near term. This new content helps clarify the Bank’s assessment of when a risk may be receding and may eventually be dropped in a future MPR; when a risk may become more important because aspects of it may be materializing, leading to a revision to the economic projection; or when the nature of a risk may be changing, for example, from being one- to two-sided. Another advance was the launch of the “Economic Progress Report” speech. Starting in 2018, we aimed to enhance transparency around the interest rate decision by having a Governing Council member deliver a speech the day following non-MPR FADs. These speeches provide more details on the Bank’s updated view of the economy, as well as insights into the key issues that figured in Governing Council’s deliberations. By October 2018, we had raised the policy interest rate to 1.75 percent. By that time, we again were becoming concerned that financial market participants were extrapolating recent policy actions to anticipate future policy, rather than taking a close look at the various risks that were relevant to policy. In her opening statement following the publication of the MPR, Senior Deputy Governor Wilkins was explicit, saying: Governing Council agrees that the policy interest rate will need to rise to a neutral stance in order to achieve the inflation target. You may have noticed that we have not used the word “gradual” to describe the pace of policy adjustments. This is to avoid the impression that we are following a preordained, mechanical policy path. The appropriate pace for interest rate increases will depend on Governing Council’s assessment at each fixed announcement date of how the outlook for inflation and related risks are evolving. The Bank began to stress the term “data dependence” during this period. This was to reinforce that our policy decisions are never predetermined and that markets should rely on their own assessments of the data and their understanding of the Bank’s reaction function in developing their forecasts of our policy. The future of risk management in a COVID-19 world The Bank has come a long way in adopting a risk management approach to our inflation-targeting framework. But it is clear that the events of this year will be a massive test for everyone’s policy-making ability. We are entering unknowable times, and we will have to be nimble and innovative. The questions are many and daunting. How and when will the global trading system recover? How will companies rebuild value chains? What structural damage will the pandemic cause? How quickly will labour markets recover, and how complete will the recovery be? Vulnerabilities linked to high levels of - 15 household debt will be accompanied by an increased pile of public debt—what kinds of policies will be needed to address this? In the very short run, actions that are normally thought of as monetary policy moves will continue in support of the financial system. After all, a well-functioning financial system is a necessary precondition for effective monetary policy. Keep in mind that monetary policy works by first having an impact on financial markets and prices of financial assets. This means that central banks can use some tools to restore market functioning in turbulent times and also to stimulate macroeconomic activity when financial markets are not disrupted. The same actions that we have taken to improve market functioning will become an important source of economic stimulus down the road. Obviously, the economy will need significant monetary stimulus in the rebuilding stage. But how much stimulus will it need and for how long? Our economic models were not built to deal with this kind of situation with extreme levels of Knightian uncertainty. For the present, policy-makers will likely rely heavily on illustrative scenarios to guide their decisions. Importantly, the economy was in very good shape when the pandemic hit: inflation was very close to target, and the unemployment rate was sitting at 40year lows. Just as a healthy, fit individual is more likely to shake off COVID-19, so is the Canadian economy. The policy interest rate, however, had made it up to only 1.75 percent, which meant that monetary policy still had very little room to manoeuvre should a major event occur. Before the pandemic, there was a strong global consensus among central banks that the next major economic downturn would need to be addressed mainly through fiscal policies, with monetary policy playing a supporting role. The pandemic created a sudden stop in economic activity that was not really addressable by monetary policy. Cutting interest rates to stimulate demand would have little effect when stores and factories were closed. Fiscal action, however, could be designed to support incomes, allowing the economy to “stop the clock” and wait for the pandemic to pass. Even so, the scale of the disturbance meant that monetary policy would need to deliver everything available to complement that fiscal action and support the economy, so the policy interest rate was moved rapidly to the effective lower bound of 0.25 percent. Further, we took a wide range of actions to ensure that financial markets continued to function so that credit would remain available to both households and firms. This episode has meant some important changes to the conduct of monetary policy. First, the level of coordination between the Bank of Canada and the fiscal authority has been unusually high. This has even included unprecedented joint Governor–Finance Minister press conferences, a show of strength intended to buttress confidence in the economy. Throughout, the importance of the independence of the central bank has been underscored by both parties. It is well understood that the Bank’s ability to lend without limit must be backed up by the inflation target to anchor inflation expectations. Second, the need to restore financial market function has prompted the Bank to launch an aggressive array of asset purchase programs. These programs are not - 16 only motivated by our mandate to promote financial stability, they are also essential if the cut in the policy rate to the effective lower bound is to find its way to the ultimate borrowers: households and firms. These actions include purchases of federal debt, provincial debt and corporate debt and are leading to a huge increase in the Bank’s balance sheet. This will reverse later as conditions gradually normalize. Through this episode, the lessons of 2008–09 led the Bank to eschew gradualism. Instead, the unconventional policy tools were deployed across the board, and aggressively so. In one press conference I was asked if perhaps we were overreacting. I responded that a firefighter has never been criticized for using too much water. At the time of writing, it appears that the approach has worked so far. Financial markets are performing well. We recognize that near-term cash demands from governments may put renewed strain on financial markets, but we are prepared for that possibility. Mostly, though, we are focusing our efforts on making sure the economy has a solid base for recovery. With all the uncertainty surrounding the economic outlook, it is fair to ask about the relevance of a risk management approach for decision making. Although a minority of observers worry that these extreme policies will create inflation someday, our dominant concern was with the downside risk and the possibility that deflation could emerge. Deflation interacts horribly with existing debt, the two main ingredients of depressions in the past. In effect, then, we were saying that the downside risks were sufficiently dire that there were no relevant trade-offs for monetary policy-makers to consider. Picture the pandemic creating a giant deflationary crater in the middle of the economy; it takes what looks like inflationary policies to offset it. The actions taken to counter the effects of the pandemic will clearly lead to higher indebtedness, for governments in particular. Getting the economy back onto its growth track—which is what is required if we are to hit our inflation target—is the surest means of servicing those debts over time. With the situation more like a natural disaster than a recession, there is reason to expect confidence to be buttressed by fiscal income supports and a reasonably swift return to growth for significant segments of the economy. Any structural damage, such as business failures and labour market scarring, will of course take longer to repair. The extreme uncertainty we face today gives an added sense of urgency to the research being done at the Bank and elsewhere. This research will help us better understand some crucial issues as risk management continues to evolve. Ongoing research related to uncertainty includes work looking at spillovers in times of uncertainty29 and how macroeconomic uncertainty can lead firms to defer hiring. Of course, the Bank also continues to work on the nexus between monetary policy and financial stability. We are working toward a better understanding of how vulnerabilities affect policy transmission. There is new modelling work K. Tuzcuoglu and L. Uzeda, “Measuring Aggregate and Sectoral Uncertainty,” Bank of Canada Staff Working Paper, forthcoming. - 17 underway to dig into the today-versus-tomorrow trade-off that is created by vulnerabilities.30 Enhancing our understanding of real financial linkages will continue to be at the forefront. We have already learned a lot about the importance of taking into account household heterogeneity, including issues related to demographics and differences in income, debt and wealth.31 Our research will take advantage of microdata to develop a deeper understanding of how household heterogeneity matters for monetary policy transmission. Heterogeneity is also important for reducing our uncertainty about macroeconomic fundamentals. The size of a firm can affect access to credit through the business cycle. Supply-chain structures can be relevant for the impact of monetary policy and fiscal policy on investment, exports and imports. Again, microdata will improve our understanding.32 This work will enhance our modelling of the macroeconomy and also improve our representation of the macroeconomy in our financial stability tools. Moreover, a number of research projects are helping us close in on a model that includes a wider variety of financial system variables and financial stability metrics than our current macro models have. This won’t be the grand synthesis, but we may end up with the kind of tool that can improve our forecasting and risk analysis and enhance our policy deliberations. The pandemic is an example of Knightian uncertainty that will also force us to reconsider many fundamental ideas about how our economy can and should function. Many have said that when we eventually return to normal, that normal will be very different from what it was before COVID-19. The pandemic has revealed weaknesses in global and domestic supply chains, and it has ignited innovation in Canada and elsewhere that has revealed payoffs for flexibility. There will be lessons to learn from how supply chains evolve. It will be interesting to see if future arrangements build in more redundancy of suppliers, and if more production of critical goods will be done domestically. More broadly, there may be changes to industrial structures as economies put less emphasis on global supply chains for products deemed essential for national health and security. One clear impact of the pandemic is that many companies and employees have quickly moved to full-time telework arrangements once thought impractical, if not impossible. Meetings that people once thought had to be done face-to-face are P. Beaudry, “Monetary Policy and Financial Vulnerabilities” (remarks at Université Laval, Québec, Quebec, January 30, 2020). Related research includes A. T. Y. Ho and J. Zhou, “Housing and Tax-Deferred Retirement Accounts,” Bank of Canada Staff Working Paper No. 2016-24 (May 2016); S. Cao, C. Meh, J.-V. Ríos-Rull and Y. Terajima, “The Welfare Cost of Inflation Revisited: The Role of Financial Innovation and Household Heterogeneity,” Bank of Canada Staff Working Paper No. 2018-40 (August 2018); E. Djeutem and S. Xu, “Model Uncertainty and Wealth Distribution,” Bank of Canada Staff Working Paper No. 2019-48 (December 2019); and K. Kartashova and X. Zhou, “How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers,” Bank of Canada Staff Working Paper No. 2020-18 (May 2020). X. Guo, “Identifying Aggregate Shocks with Micro-level Heterogeneity: Financial Shocks and Investment Fluctuation,” Bank of Canada Staff Working Paper No. 2020-17 (May 2020). - 18 now taking place virtually. Out of necessity, online commerce is expanding rapidly. It is worth considering whether these trends will accelerate digitization of the economy and more broad-based use of some technologies.33 It is also worth considering whether this will accelerate initiatives that contribute to a reduction in carbon emissions. Finally, there will be lessons to learn about the effectiveness of various policies— fiscal, regulatory, financial and monetary—and how they interact. Conclusion If there is one common thread to this romp through recent economic history, it is that economists and policy-makers learn through experience. Uncertainty has been a common theme of my predecessors. This brings a certain measure of humility to the policy table and makes us always wishing for more understanding, more insight and more clarity. Certainly, the lessons from the global financial crisis helped enormously in our approach to financial markets during the current pandemic. Looking ahead, our experience will be supplemented by research to improve our methods of dealing with uncertainty and risk management. We can find better ways to model the impact of Knightian uncertainty on confidence and behaviour. We can broaden our analysis of the optimal policy mix to manage risks and uncertainty. We can improve our measurement of the trade-offs between financial stability and inflation targeting. This habit of continuously learning will be absolutely essential as we work our way through unknowable times. I have every confidence that we will find our way back to prosperity here in Canada, not just because of the strength of our foundations, but in the usual way–through hard work and ingenuity. T. Lane, “Money and Payments in the Digital Age” (remarks to the CFA Montréal FinTech RDV2020, Montréal, Quebec, February 25, 2020).
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Remarks by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, to the Greater Sudbury Chamber of Commerce, Sudbury, Ontario, 4 June 2020.
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Toni Gravelle: Economic progress report - keeping markets working Remarks by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, to the Greater Sudbury Chamber of Commerce, Sudbury, Ontario, 4 June 2020. * * * Introduction Good afternoon ladies and gentlemen. It’s a pleasure to appear before you today to talk about the current economic situation and how the Bank of Canada is contributing to the eventual recovery. Even though I can’t be with you in person, I am excited for the chance to return—albeit virtually— to my roots in Northern Ontario. I grew up on a dairy farm in Corbeil, just outside of North Bay. I worked at my parents’ meat shop, which is where I developed my interest in economics and markets. I also have family living in the Sudbury area. Growing up in Northern Ontario, I learned that hard work is what supports Canada’s capacity as one of the largest exporters of base metals. This includes nickel—the commodity that put Sudbury on the map. Your area’s advanced mining and smelter technology is keeping Canada at the forefront of low-cost base metal production. My formative years have served me well throughout my career. And they continue to inspire me in my role at the Bank of Canada where I help lead our work around financial stability and financial market functioning. You can probably imagine that my job has shifted quite a bit given recent market turbulence. The COVID-19 pandemic poses extraordinary challenges to Canada, to Canadians and to the economy. This has required extraordinary responses—both from a fiscal and a monetary policy perspective. In the short term, we need to keep credit flowing and financial markets working, so households can continue to pay their bills and companies can cover their operating costs. And as we move from crisis response to recovery, we need to maintain a well-functioning financial system. That way, our policy actions get through to people and businesses. In turn, when containment measures are lifted, the recovery will be easier to attain, and sustain. Today, I’d like to discuss some of the specific programs the Bank has put in place to achieve both of these goals—that is, to ensure funding liquidity and market liquidity. I’ll also provide you with some early results we’re seeing. Finally, I’d like to talk about our interest rate announcement yesterday and how the actions we’ve taken will contribute to the eventual recovery. The importance of liquidity So, what does liquidity mean, and why does it matter? Imagine that you are doing your weekly grocery shop, but when you get to the cashier you realize you don’t have your wallet. Even though you have lots of assets—maybe a house or a car or even a boat in the driveway—you can’t quickly or easily trade those for milk and bread. You are in a liquidity crunch because you don’t have cash on hand to buy the goods and services you need. 1/6 BIS central bankers' speeches Similarly, the financial system can only function smoothly if people, companies and governments can borrow the cash they need to operate. And this borrowing is only possible if financial institutions—the source of this cash—have access to borrowing themselves in wholesale debt markets. This is the essence of funding liquidity—being able to quickly and predictably borrow money in markets or from banks. Separately, we also refer to market liquidity—the notion of being able to sell assets quickly without offering a large price discount. Participants in financial markets depend on market liquidity to be able to manage their asset and cash holdings by trading large amounts of assets at predictable prices. As you can see, market and funding liquidity work hand-in-hand in normal times. Institutions that need cash can get it by borrowing from or selling assets to other institutions that may have surplus cash. But in a crisis, everyone is looking to get more cash. Those who have cash may hoard it. And liquidity dries up. When there’s not enough liquidity, it breeds uncertainty and turmoil across the whole the financial system. This makes it more difficult and more expensive for households and businesses to get credit at a time when they need it most. And all of this can worsen the overall impact of any large-scale economic shock and lengthen the recovery timeline. So let’s talk about the liquidity crunch that happened as the coronavirus hit. Toward the end of February, as it became clear that COVID-19 was becoming a global pandemic, turbulence in financial markets increased. More and more economies worldwide shut down, and prices in financial markets began to reflect a downturn in the economy. It’s important to remember that we’ve never experienced a shock of this nature before, so markets were gripped with uncertainty about how long the downturn might last and how deeply Canadians would feel its impacts. As you might guess, markets hate uncertainty. When uncertainty invades the mindset of market participants, they tend to put more weight on the worst-case outcomes for the economy and asset valuations.1, 2 In early March, as the scope of the lockdown became apparent, there was a “rush to the exits,” where market participants sold financial assets in a panic. Markets began to seize—they weren’t functioning well because everyone was looking to sell assets and secure cash at about the same time. This generated a sharp increase in volatility and a drying up of market and funding liquidity. This demand for cash, or liquidity, was system-wide. It affected both those that wanted more liquidity and those who supply it, such as banks. Because the problem affected the whole system, the Bank of Canada responded swiftly with a broad suite of programs. Programs and facilities At the outset of the pandemic and within a span of about three weeks, we cut our policy interest rate from 1.75 to 0.25 percent. This is as low as we think we can reduce it without causing problems for the financial system. Cutting the policy interest rate supports economic activity by lowering borrowing costs. We 2/6 BIS central bankers' speeches realize these cuts won’t encourage a lot of extra borrowing and spending during this lockdown phase Further, the reduction in our policy rate is entirely consistent with our inflation-targeting framework. We know that to bring inflation back to the 2 percent target, we need to boost economic growth and employment. But even while we were cutting our rate, we could see that the financial system was running short on liquidity, and credit wasn’t flowing properly. So the Bank deployed some other tools from our tool kit. Funding liquidity: credit for banks, people and businesses We started by addressing the immediate funding liquidity issues gripping our financial institutions. We knew that by helping with funding liquidity, banks would be able to meet more demand for credit coming from people and businesses. So we ramped up our repo operations. A repo provides funding liquidity to financial institutions for a set term, backed by high-quality collateral. In normal times, we use repos to manage our balance sheet—part of our regular business operations. We typically carry out term repos once every two weeks, for amounts of $3 billion to $6 billion and for terms of one or three months. However, during the crisis, we “cranked up the volume to 11” to allow the banking system to tap directly into much-needed funding liquidity. The Bank of Canada increased the frequency of repo operations to twice per week and for much larger amounts—peaking at $24 billion per operation. We broadened both the list of financial institutions we engage with and the type of collateral we accept. We also extended the terms of our repo operations for durations of up to 24 months. Market liquidity: asset purchases to improve market functioning As the crisis was unfolding, not only did we see pressures on the flow of credit, but we also saw market liquidity dry up. By this, I mean that both buyers and sellers remained on the sidelines. Prices were extremely volatile, and they didn’t reflect underlying economic realities. And in many cases, investors were demanding large premiums to take on riskier assets. This called for the Bank to bring out brand new tools from its tool kit. Our staff worked incredibly hard to take six purchase facilities that existed only on paper and turn them into reality. Quickly. To ease strains in key short-term funding markets for Canadian companies, we started programs to buy bankers’ acceptances and commercial paper. And more recently, we began a program to buy up to $10 billion of high-quality corporate bonds in the secondary market. We also introduced programs to support liquid and well-functioning markets for short-term and long-term provincial government borrowing. Underpinning economic recovery: laying the foundation for growth The Bank of Canada has taken one other very important action in response to the COVID-19 crisis. I’m referring to our large-scale asset purchases of Government of Canada securities on the secondary market. These purchases are supporting the liquidity and efficiency of this foundational market. Like the repo operations I talked about earlier, we buy these assets as part of our normal 3/6 BIS central bankers' speeches business operations. This is because we need to have assets on our balance sheet that match our liabilities, which normally consist mainly of bank notes. What’s different is the scale of these purchases. We are buying at least $5 billion of securities per week, and we will continue to do so until the economic recovery is well underway. We focused on the Government of Canada bond market because that market sets the baseline for the entire fixed-income market. For instance, the yields of five-year Government of Canada bonds are an important determinant of five-year fixed mortgage rates. In normal times, when it is working well, the government bond market reflects what investors think about the economy and future interest rates. But when the market isn’t working well, it makes it harder to price other assets. It’s vitally important that Government of Canada debt markets are in tip-top shape, so when the Bank takes policy actions—like raising or lowering our policy interest rate—these actions will transmit through the economy and we will be better able to achieve our inflation target. Effects on our balance sheet All the programs I’ve mentioned are designed to keep debt markets functioning, ensure cash is available to those who need it and provide a stabilizing force to boost Canadians’ confidence. As a result of our actions, the Bank’s balance sheet has grown from about $120 billion in early March to over $460 billion. It’s not new for central banks to expand their balance sheets to satisfy an increased need for liquidity. In fact, this is a key reason why central banks were established—to be a lender of last resort, providing liquidity across the economy. But some people worry this expansion of the balance sheet will lead to runaway inflation. In this environment, we are more concerned with low inflation—and potentially deflation—given the depth of the economic downturn. I want to make it clear that we still have our policy rate at our disposal if inflation were to heat up. It can be raised to influence borrowing costs, credit growth and economic activity, regardless of the size of our balance sheet. Early, positive signs With all the programs I’ve mentioned and their effects on our balance sheet, I’m sure you’re wondering what kind of results we’re seeing. We published our Financial System Review a few weeks ago, and we included some early indicators. I’m pleased to report that many key financial markets that had been showing signs of significant liquidity stress now appear to have good functioning restored. Bid-ask spreads and yield spreads in many markets have narrowed significantly. This tells us that market liquidity has improved. In addition, financial institutions now have better access to funding liquidity in markets. This has had positive, measurable impacts on Canadians. In the early days of the pandemic, when lenders had a hard time accessing cash, they passed along their higher borrowing costs to the people and businesses who wanted to borrow from them—even as the Bank of Canada’s policy interest rate fell. After having our facilities in place for some time, lenders can now readily access the funding they need, and we’ve seen mortgage 4/6 BIS central bankers' speeches rates on new loans start to decline. Furthermore, many of our programs to support financial markets are being used less and less as conditions stabilize. That is why we announced yesterday that we will scale back some of the facilities we have put in place. In particular, we are reducing the frequency of our activity in markets for both term repos and bankers’ acceptances. These are positive early results. Governing Council will continue to ensure we use the right tools for the right job, and that our response is proportional to the level of financial system or economic risk we see. The Bank is prepared to augment the scale of any of its programs if needed to support market functioning. And if further monetary stimulus is required to meet our inflation target, the Bank has tools available to deliver that stimulus. Yesterday’s decision Let me turn now to the economy and talk about the discussions that led to our monetary policy announcement yesterday. Just to recap, we announced that we kept our policy interest rate at the effective lower bound and maintained our commitment to continue large-scale asset purchases until the economic recovery is well underway. In reaching this decision, we naturally spent a great deal of time talking about the economic data we have seen since the pandemic hit. The incoming data confirm the severe impact of the pandemic on the global economy. It looks like this impact may have peaked as countries are starting to reopen their economies. Financial conditions have also begun to improve. But we know the reopening process is going to be long and uneven, and there could easily be setbacks. In terms of the Canadian economy, let’s remember that we came into the crisis in relatively good shape. The Canadian economy was operating close to its capacity, our national jobless rate was near a 40-year low, and inflation was near target. To be sure, regions such as Sudbury were feeling the impact of lower commodity prices. And oil-producing regions were getting hit by another dramatic drop in oil prices. Some temporary factors, including rail blockades and teacher strikes, were also weighing on growth as we headed toward March. Then came the pandemic, and it became clear right away that the economic impact would be profound. Last week, we received the national accounts data for the first quarter of the year, including March when the shutdowns really began. This report showed the economy shrank by 2.1 percent in the first three months of the year. For the second quarter, we are expecting the level of output to be a further 10 to 20 percent lower. As bad as that sounds, this outcome would be in the upper half of the range that we estimated in April’s Monetary Policy Report (MPR). So far, we have seen employment plunge at an unprecedented rate with 3 million jobs lost through April. However, the last Labour Force Survey from Statistics Canada shows that 43 percent of people who have lost their job since February said they expected to return to it. This suggests that many of these people may be back to work as the containment measures are lifted, although this is by no means assured. By comparison, only 15 percent of Canadians who lost their job during the global financial crisis said they expected to return to the same one. Inflation, meanwhile, has dropped close to zero, driven mainly by falling prices for gasoline. We expect that temporary factors will keep inflation below the target range in the near term. However, we know that the consumer price index (CPI) is not giving an accurate picture of inflation for many Canadians at the moment. That is because the weights of the goods and services in the CPI are fixed. And during the shutdown, some items—such as gasoline and travel—are simply not being consumed as they usually are. However, our measures of core inflation have declined only slightly, to a range from 1.6 to 2 percent. This is not surprising, given that core measures generally remove the impact of the 5/6 BIS central bankers' speeches most volatile prices in the CPI, such as gasoline. Naturally, my colleagues on Governing Council and I talked a lot about where we think the economy will go from here. And we saw some reasons to be hopeful that the worst can be avoided. First, we noted that a gradual reopening of the economy is starting in most areas of the country. Spending on cars and houses has picked up, and measures of consumer confidence have increased from the low levels recorded last month. Further, we see signs that the various fiscal support measures put in place by governments have been effective in supporting income. Obviously, being laid off is a painful experience, even more so during a pandemic. And the amount of income support available varies from person to person. That said, the income support announced so far is scaled to replace the labour income lost across the economy. What is more, government measures are helping people remain attached to their jobs. This will be absolutely critical for supporting the recovery. Finally, as I noted in this speech, there are clear signs that credit is flowing and the financial system is working well. This will be another key piece underlying the strength of the recovery. Despite the positive signs, though, many risks and uncertainties remain. A lot will depend on whether we as a country are successful in managing the risk of possible future waves of COVID19, and the pace at which containment measures are lifted. This applies to the global economy as well as Canada’s. We will be paying close attention to how the pandemic is affecting growth and demand in key markets for Canadian exports. As we get more data, we will have a better sense of the impact of the containment measures. These data will also help us answer a number of important questions. What’s going to happen with business and consumer confidence? Will the pandemic lead to lasting changes in household saving and spending habits? How many companies will be unable to reopen their doors, and how many job losses will be permanent? How quickly will those people who lose their jobs be able to find other work? How will companies adjust or rebuild global supply chains? And so on. Ultimately, the stance of the Bank’s monetary policy will depend a lot on what happens to the balance between what the economy can supply and what people demand, because this will affect the outlook for inflation. It is possible, for example, that economic supply could recover faster than demand if businesses reopen quickly but consumers remain cautious. In the lead up to our July MPR, and beyond, it will be key for us to understand how the pandemic has affected demand, employment and the economy’s capacity to produce goods and services. As market function improves and containment measures ease, the Bank’s focus will shift to supporting the resumption of growth in output and employment. The Bank maintains its commitment to continue large-scale asset purchases until the economic recovery is well underway. Any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target. Thank you very much for your attention. Now, I would be happy to respond to some questions. I would like to thank Tamara Gomes for her help in preparing this speech. 1 G. Zhao, “Confidence, Bond Risks, and Equity Returns,” Journal of Financial Economics 126, no. 3 (December 2017): 668–688. 2 G. Zhao, “Ambiguity, Nominal Bond Yields and Real Bond Yields,” Bank of Canada Staff Working Paper No. 2018–24 (June 2018). 6/6 BIS central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 16 June 2020.
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Tiff Macklem: Opening statement before the House of Commons Standing Committee on Finance Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 16 June 2020. * * * Introduction Good afternoon, Chair and committee members. It is an honour for me to appear before you as the 10th Governor of the Bank of Canada. I look forward to working with parliamentarians over the next seven years through regular appearances before committees of the House and Senate. These are an important part of the Bank of Canada’s accountability to Canadians. Today, Senior Deputy Governor Wilkins and I are pleased to be here as part of your study of the government’s response to the COVID 19 pandemic. We particularly look forward to your questions and feedback on the foremost concerns of Canadians at this very difficult time. The Bank of Canada is committed to doing everything we can to help the Canadian economy recover from the enormous impact of COVID 19. Today I will talk about the Bank’s four main functions and elaborate on how the Bank is responding to the pandemic. Then I will say just a few words about our operations in general. After that, we will be happy to answer your questions. Currency Let me begin with our most visible and tangible function—our bank notes. As a central bank, we provide a public good through a universally accepted means of payment. It is the Bank of Canada’s job to provide Canadians with safe, secure, high-quality bank notes that they can use with confidence. We know COVID 19 has changed the relationship some Canadians have with cash, at least temporarily. The Bank recently carried out a survey in collaboration with Ipsos and Statistics Canada. We found that about one-third of Canadians say they are using bank notes less frequently because of the pandemic. And we know that some retailers are asking Canadians to use electronic payment methods instead of cash. The Bank strongly advocates that retailers accept cash, for two reasons. First, some Canadians don’t have a bank account, and many others have accounts that limit the number of debit transactions or subject them to fees. These are often Canadians who are particularly vulnerable economically, and they depend on cash to make essential purchases. Refusing cash puts an unfair burden on Canadians who do not have the same ease of access to financial services that many of us take for granted. Second, it is important to note that handling bank notes is no more risky in terms of virus transmission than touching other common surfaces. Because Canada’s bank notes are polymer, they can be cleaned with soap and water. During this pandemic, public health authorities have stressed to Canadians the importance of hand washing. All of us should follow this advice, including those who handle cash in their jobs. The pandemic may be accelerating an established trend where Canadians are using bank notes less often relative to electronic payments. About 1 in 10 Canadians claims not to use cash at all. At the same time, the number of bank notes in circulation continues to grow, along with demand. The Bank will continue to watch closely to see how the demand for cash evolves, and we will be ready to supply all the bank notes that people and businesses want to hold. 1/4 BIS central bankers' speeches Related to the trends in bank note use, we have also been looking closely at the idea of a central bank digital currency. The Bank of Canada has become a global leader among central banks in research in this area. Earlier this year, Deputy Governor Tim Lane spoke about the circumstances when it might make sense for the Bank of Canada to issue our own digital currency. This includes a situation in which most Canadians stopped using bank notes. We don’t believe that a digital currency is required at this time. But we are moving forward with contingency planning so that if we ever judged that we should issue a digital currency, we would be ready. Funds management The second function I will mention is our funds management role. The Bank is the fiscal agent for the government. We advise the government on strategies for its debt and cash management, and we conduct auctions for federal government bonds and treasury bills. We also provide banking services to some financial institutions, Crown corporations, other central banks and international financial organizations, such as the International Monetary Fund. This is an important function in regular times. We help the government manage its finances in a cost-effective way. But this function has taken on added importance during the pandemic. The government’s financing needs have increased at an unprecedented pace this fiscal year with the introduction of measures to reduce the pandemic’s impact on the Canadian economy. I note that even with this record issuance, Canada’s net debt-to-GDP ratio remains the lowest among G7 countries. Because interest rates on Government of Canada debt serve as the benchmark for many other financial markets, it is imperative to keep government bond markets working well. To do this, the Bank has implemented a number of extraordinary measures, which brings me to our financial system function. Financial system Our third function is the promotion of a stable and efficient financial system. The Bank is unique in that it has a system-wide perspective on the stability and efficiency of the financial system. We bring this perspective to our work with federal and provincial partners to make sure the financial system is working to support the real economy. Credit is the lifeblood of market-based economies. In a crisis, central banks have the critical imperative to provide the liquidity the financial system needs to keep credit flowing. This traditional role for the central bank goes back hundreds of years. In the 1800s, British journalist Walter Bagehot famously said that in a crisis a central bank should lend freely, at a penalty rate, against good collateral. What he meant was that a central bank should always be ready to make sure the financial system has sufficient cash or liquidity during times of stress so that it can help the economy weather the storm, rather than becoming a headwind itself. The onset of the COVID 19 pandemic was hugely disruptive to many vital financial markets. Liquidity disappeared from markets, as participants sought to protect their own liquidity by increasing their cash holdings. Amid the uncertainty, credit markets began to seize up. The Bank’s priority from March to May was to restore proper functioning to financial markets so that Canadian households, businesses and governments could access credit to withstand the crisis. This should also help set the stage for recovery. Under the leadership of my predecessor, Governor Poloz, as well as Senior Deputy Governor Wilkins, the Bank did an outstanding job restoring smooth functioning to key markets, ensuring ample funding and market liquidity. The Bank revived some emergency programs used during the global financial crisis over a decade ago. And it brought into operation several new measures with remarkable speed and precision. 2/4 BIS central bankers' speeches We are pleased to report that demand for liquidity is returning to normal levels, and market functioning has improved considerably. The Bank has therefore scaled back the frequency of some operations because financial market participants are not using them. We stand ready to ramp up these programs again if we see that they are needed. Monetary policy Finally, let me say a few words about the conduct of monetary policy. Our policy framework is set out in the inflation-targeting agreement established with the government and renewed every five years. The agreement sends an important signal that the democratically elected government and the Bank are agreed on our policy goal, while giving the Bank the operational independence to pursue that goal. This independence is crucial, both in normal times and in crisis times. Through this pandemic, the Bank of Canada, the government, and financial Crown corporations and agencies have all been working cooperatively to stabilize the financial system, keep credit flowing and support the economy. The Bank’s policy actions are designed to complement the government’s fiscal efforts. At the same time, we are cognizant of each others’ mandates, and the government has made it clear that it fully respects our independence. As Governor, I will protect the Bank’s ability to act independently, consistent with our mandate, because that independence is critical to the confidence that Canadians place in us, the credibility of our inflation target, and our capacity to achieve it. Under our policy framework, our mandate is to provide low, stable and predictable inflation. That’s the best contribution we can make to the country’s economic and financial welfare. Achieving our inflation goals lays the foundation for sustainable economic growth. And keeping inflation close to its target means the economy is running close to capacity with full employment. Our inflation target takes on added importance during times of crisis. As the Bank moves into uncharted waters using tools it has not deployed before, the inflation target remains our beacon. Our monetary policy actions are anchored in the goal of bringing inflation back to target by helping the economy return to its potential capacity with full employment. COVID 19 and the measures to contain it represent an economic shock of unprecedented size and scope to our economy. By April, more than 3 million Canadians lost their jobs and another 3.4 million were working fewer than half of their regular hours. With containment measures starting to be lifted in some parts of the country, we saw a resumption of job growth at a national level in May. We expect this to accelerate as the economy continues to reopen, but we have a long way to go, and not all the jobs that were lost are coming back. Important fiscal efforts are keeping as many Canadians as possible attached to their jobs and helping households and companies make it through the crisis. These efforts are supporting Canadians now and will position the economy for recovery. In our latest interest rate announcement, we said that we expect economic growth to resume in the third quarter. And with market function improved and containment restrictions easing, the Bank’s focus will shift to supporting the resumption of growth in output and employment. The July Monetary Policy Report will provide our updated assessment of the outlook for output and inflation. Given the unknown course of the pandemic, I expect this will be more of a scenario than a forecast and will also include a discussion of the key risks. While our monetary policy will continue to be grounded in our inflation-targeting framework, we acknowledge that the consumer price index isn’t currently giving an accurate picture of inflation for many Canadians. Buying patterns and prices have changed drastically. We know many people are buying less gasoline and fewer travel services while continuing to purchase food from stores. This makes their experience quite different from the data being reported. Bank staff have been working with Statistics Canada to better understand the implications of these changes in 3/4 BIS central bankers' speeches buying patterns. The Bank has acted decisively by bringing the policy interest rate to its effective lower bound of 0.25 percent. We have also begun large-scale asset purchases. As such, we are using our balance sheet to keep core funding markets working well and to deliver monetary stimulus to support the economic recovery. We have committed to continue purchases of Government of Canada bonds until the economic recovery is well underway. Any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target. Conclusion To conclude, let me say a few words about the Bank’s operations. Currently, the vast majority of staff are working from home. This is a testament to the flexibility and resilience of the Bank’s systems and its people. A handful of essential workers are on site, including security, IT staff, traders and banking operations colleagues at our head office, as well as other staff at our backup site in Calgary and our regional operation centres. Bank staff are delivering for Canadians, and I am confident that this will continue. The Bank has a long tradition of ensuring accountability and transparency, and we are committed to building on this. We will maintain our momentum in a couple of areas. First, we recognize that all Canadians have the right to understand what their central bank is doing and why. This is even more important today as we undertake unprecedented policy actions. We will be transparent about the results of our asset-purchase programs. And we will continue to promote the use of plain language and provide resources that can help demystify our operations for interested Canadians, with features such as multimedia articles in The Economy, Plain and Simple on our website. Second, we have stepped up efforts to engage with a wide variety of stakeholder groups beyond our traditional partners. Our goals are to reach Canadians directly and increase public knowledge of and participation in our activities in order to broaden understanding of our work and to build trust. A number of activities to engage the public are upcoming or already underway. These include an online campaign to involve the public in the 2021 renewal of our inflation-targeting framework. We also just concluded a campaign inviting the public to nominate an iconic Canadian to be featured on the next five dollar note. Let me stop there. Senior Deputy Governor Wilkins and I would now be happy to answer your questions. 4/4 BIS central bankers' speeches
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Remarks (by videoconference) by Mr Lawrence Schembri, Deputy Governor of the Bank of Canada, to the Greater Saskatoon Chamber of Commerce, Saskatoon, Saskatchewan, 18 June 2020.
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Remarks by Lawrence Schembri Deputy Governor Greater Saskatoon Chamber of Commerce (by videoconference) June 18, 2020 Living with limits: household behaviour in Canada in the time of COVID-19 Introduction Good morning. I hope you are all well in Saskatoon. I very much regret that I cannot be with you in person today. The COVID-19 pandemic has disrupted all of our lives—unfortunately, some more severely than others. And because of this pandemic, we are all living with limits on our behaviour. One of the things I enjoy most about giving public speeches as a Deputy Governor is having the opportunity to visit different towns and cities throughout Canada and especially to meet people like you. I very much like listening and learning about your businesses and the local economy and discussing the Bank of Canada, our economic outlook and our policies. We are fortunate to be living at a time when technology can make some of this experience possible even under the current circumstances. Collecting your views will be most helpful today because I want to talk about the impact of the virus and the related containment measures on the day-to-day behaviour of Canadian households. Specifically, I would like to examine how spending patterns for goods and services and for housing have changed. I’d also like to discuss shifts we are seeing in household borrowing behaviour and indebtedness. Analyzing the behaviour of Canadian households during the containment period and the early stage of reopening will give us insights into how the economy might perform in the future. In particular, we are interested in the speed, strength and breadth of the pickup in economic activity during the recovery period. Consumption and housing will be critical to the recovery because they normally represent roughly two-thirds of economic activity in Canada. 1 1 Statistics Canada defines consumption as spending on goods and services that are consumed by the household within the year they are purchased, while the definition of residential investment (housing) I would like to thank Mikael Khan, Fotios Raptis, Patrick Sabourin and Brian Peterson for their help in preparing this speech and Rebecca Frost for superb research assistance. Not for publication before June 18, 2020 1330 Eastern Time -2Household behaviour since the outbreak of the virus in Canada in mid-March has been shaped by changes to both supply and demand. On the supply side, the restrictions on the goods and services available for sale have changed what Canadians are buying. On the demand side, the economic lockdown has had a major impact on household income and confidence. Fortunately, before the pandemic struck, the Canadian economy was in reasonably good shape. Inflation was close to our 2 percent target and wage growth was solid, consistent with an economy operating close to capacity and an unemployment rate near a 40-year low. This resilient starting point allowed Canadian authorities to respond with an extraordinary set of aggressive remedial fiscal and central bank policies, mitigating the negative impact of these forces on household behaviour. Fiscal policies have helped replace lost income while the Bank’s policies that focused on reducing financial system stress have maintained low-cost access to credit. 2 These policies have helped ensure households have the credit they need to bridge this difficult time. Containment and a two-phase recovery Given this context, I would like to use this speech to explore and analyze three main points, as illustrated by Chart 1: 3 Chart 1: The recovery of economic activity and household spending will have two phases: reopening and recuperation A D C Containment C Recuperation Reopening B Time First, household expenditures on goods and services as well as on housing changed dramatically during the containment period, from A to B. Overall, the includes the construction of a new house, renovations and the costs associated with buying an existing house. Goods typically account for about 43 percent of consumption and cover everything from cars to clothing, groceries to gardening tools. The remaining 57 percent is services. These range from haircuts to childcare, tuition, restaurant meals, vacations and—the biggest part—rent and utility bills. 2 For more information on the recent actions taken by the Bank of Canada, see Wilkins (2020), Lane (2020), Gravelle (2020) and Poloz (2020). 3 Chart 1 is a stylized version of Chart 11 in the April 2020 Monetary Policy Report. -3level of spending fell, and its composition shifted. While most of this change is likely temporary, some could persist. Second, we are seeing signs of a partial bounce back in household spending in the first phase of the recovery. This reopening, from B to C, happens as the containment measures are relaxed. Households are now able to buy goods and services that were not easily available during the containment period—I definitely need a haircut! We are also seeing an increase in employment income and household confidence as workers are rehired and economic activity picks up to satisfy this rebound in demand. Finally, we expect that the second phase of the economic recovery, from C to D, will be a more gradual phase of recuperation, because the future evolution of the virus and the economy remains highly uncertain. As well, the recuperation phase could be bumpy as different provinces and sectors open up at different times. It could also be slowed by an economy scarred by widespread firm closures and by displaced workers, who may have to relocate or retrain to find employment. As I discuss the road ahead for households, I will also examine how the Bank of Canada’s policy actions to support the recovery have complemented the government’s fiscal policy measures that have targeted vulnerable workers and households. Declining in tandem—household income and confidence Before I discuss how spending has changed, let’s consider two key determinants—income and confidence. The pandemic and the resulting economic shutdown, as well as the related decline in the global prices of oil and other commodities, have had an unprecedented adverse impact on household income. As they have in other countries, economic activity and employment in Canada have fallen sharply, notably in sectors affected by physical distancing (Chart 2). Chart 2: Declines in employment were greatest in sectors most affected by physical distancing Percent change between February 2020 and May 2020 (%) 0% -10% -20% -30% -40% -50% -60% -70% -80% -30.5% -28.0% -21.5% -19.0% -16.4% -9.9% -4.0% -24.0% -63.0% Sources: Statistics Canada and Bank of Canada Employment Average hours worked Total hours worked Last observation: May 2020 Since February, nearly 3 million jobs have been lost, and the average employee is working four fewer hours per week. Together, this has resulted in a 25 percent decline in total hours worked since February. The unemployment rate in May 2020 was worse than that experienced during the 2007–09 global financial crisis, increasing to 13.7 percent. It would have been even higher had 1.2 million Canadians not left the labour force due, in part, to their inability to search for work. What’s more, job losses were more pronounced among lower-wage workers, who typically have less savings and less access to credit. That leaves them more vulnerable to this economic shock.4 Consequently, labour income fell in the first quarter, dropping sharply in March. The level of labour income is estimated to have decreased by about 15 percent, or more than $40 billion, in the first half of 2020 relative to its pre-COVID-19 level. These negative effects on total employment income were largely offset by the swift fiscal policy actions of the federal government, notably the Canada Emergency Response Benefit (CERB) and the Canada Emergency Wage Subsidy (CEWS). 5 These programs were well targeted, as the income replacement rates were the highest for the most vulnerable workers. 6 4 Underemployment remained substantial, with the labour underutilization rate standing at roughly one-third of the labour force (35 percent) in May, compared with 12 percent in February. This rate includes those who were unemployed; those who were not in the labour force but wanted a job, although they did not look for one; and those who were employed but worked half of their usual hours or less. 5 So far, the federal government has disbursed $43.5 billion in income support to households through the CERB, helping 8.4 million applicants. Another $13.3 billion (as of June 15) has been paid to firms through the CEWS to support the wages of employees. Other fiscal measures include a one-time supplementary GST/HST credit payment and an enhanced Canada Child Benefit. Partly because of these government transfers, household disposable income increased 1.7 percent in the first quarter. 6 Income replacement is expected to differ significantly across sectors. For workers in accommodation, food and retail trade, the income replacement rate is expected to be, on average, about 100 percent, while it will be much lower for workers in sectors such as construction or manufacturing. -5Household confidence has also declined across regions because of the elevated uncertainty about the evolution of the virus and its economic impact (Chart 3). The decrease in incomes, in consumer confidence and in the willingness of shoppers to leave their homes all led to much weaker household spending. 7 Chart 3: The virus outbreak led to a sharp drop in consumer confidence across regions Index: 2014 = 100 Index May-17 Sep-17 Jan-18 Ontario May-18 Sep-18 Jan-19 Atlantic provinces May-19 Sep-19 Jan-20 Prairies Source: Conference Board of Canada May-20 Last observation: May 2020 Falling consumption and shifts in spending Consumption during the containment period was considerably affected by the impacts of the pandemic on household income and confidence. However, even before the pandemic hit our shores earlier this year, there was increasing evidence that consumption growth was slowing as households were becoming more cautious, perhaps because of elevated debt levels and a somewhat less robust economy. When the containment measures were imposed in Canada in mid-March, many households had to suddenly prepare for a prolonged stay inside their homes to reduce their exposure to COVID-19. As a result, spending habits changed significantly. In particular, household consumption was affected by the reduction of goods and services available for purchase. Many non-essential stores and restaurants were forced to close, while others had only online access or takeout service. 8 These demand and supply effects not only lowered consumption during the containment period but also changed what Canadians were buying. The volume of consumption, as measured by the National Accounts, plummeted by nearly 9.0 percent in the first quarter of 2020 at an annual rate, and the 7 On the demand side, sharp declines in stock markets had negative wealth effects, and lower commodity prices reduced Canada’s terms of trade. Both factors also weighed on consumption. 8 According to a survey by Statistics Canada, 40 percent of retailers closed their doors in March, including 91 percent of clothing retailers. Most remained closed until recently. In contrast, grocery and pharmacy stores remained open. -6preliminary release for April indicates a further decline as nominal retail sales fell 15.6 percent (Chart 4). 9 Chart 4: Retail trade activity declined sharply across Canada Nominal retail trade deflated by provincial CPI for goods, index: April 2018 = 100 Index Apr-2018 Aug-2018 Canada Dec-2018 Apr-2019 Energy-intensive regions Aug-2019 Dec-2019 Rest of Canada Note: The April 2020 value for Canada is a preliminary estimate. Source: Statistics Canada Apr-2020 Last observation: April 2020 Consumption patterns during the early stages of the shutdown saw a boom in demand for necessities. Many households stocked up on food, alcohol and personal care products—creating the infamous runs on toilet paper, flour and cleaning products. In the first week of March, sales of hand sanitizer rose 792 percent over the same week last year (Chart 5). Chart 5: Sales of health and household cleaning items spiked in March 52-week percent change January Hand sanitizers February Masks and gloves Note: Data are experimental and subject to revision. Source: Statistics Canada consumer prices program, special tabulation March Soap April Bathroom tissue % -100 Last observation: April 2020 9 Survey results suggest that 75 percent of Canadians reported they were spending less than before the pandemic. On average, Canadians left home to go grocery shopping once a week, with 93 percent indicating they stopped going out completely except for necessities. -7But demand elsewhere was slumping, as larger-ticket items such as cars and necessities such as clothing and shoes became more difficult to buy. 10 Spending on outside-the-home entertainment, restaurant meals, travel and personal services came to a halt. Indeed, the method of purchase became vitally important: sales of goods and services that could be bought online soared by more than 40 percent compared with last year, while those that required an in-person presence fell (Chart 6). 11 Chart 6: Retail e-commerce increased markedly % Year-over-year percent growth, non-seasonally adjusted data -10 Retail e-commerce Note: Retail trade series include NAICS 44 to 453. Source: Statistics Canada Retail trade -20 Last observation: March 2020 According to our recently conducted Canadian Survey of Consumer Expectations (CSCE), the full results of which will be released in July, more than half of respondents (55 percent) reported their current spending was lower than before the outbreak. Among those who had planned to make a large purchase before the outbreak—such as a car, house or major renovation— the majority decided to either delay, reconsider or abandon their purchase. Overall, this decline in income and confidence led to lower household spending and a dramatic shift in what and how Canadians were buying during the early stage of the pandemic. Measuring price pressures These shifts in spending patterns have affected consumer prices. The sharp deceleration in consumer price index (CPI) inflation over the past three months from 2.2 to -0.4 percent is mostly due to the declines in the prices of gasoline, traveler accommodation, and clothing and footwear as demand for these items has decreased (Chart 7). In contrast, the price pressures on some consumer 10 Spending on clothing and footwear declined 50 percent at an annualized rate, while purchases of new motor vehicles dropped by 29 percent in the first quarter of 2020. 11 Roughly 40 percent of Canadians have been doing more shopping online in the second quarter of 2020, according to the Bank’s Canadian Survey of Consumer Expectations (CSCE)—to be published on July 10. They have also been prioritizing food delivery, with 26 percent of Canadians using food delivery services such as Uber Eats and Instacart more often than before COVID-19. -8goods, such as rice, toilet paper and household cleaning products, largely reflect stronger demand. 12 Chart 7: Inflation has reflected diverging demand trends across the CPI components a. CPI components affected by lower demand Year-over-year percent growth b. % Year-over-year percent growth % -10 -20 -30 -2 -40 -4 -50 Clothing and footwear Gasoline Traveler accomodation Source: Statistics Canada and Bank of Canada calculations CPI components affected by higher demand Last observation: May 2020 -6 Food in stores Paper supplies Household cleaning products Source: Statistics Canada and Bank of Canada calculations Last observation: May 2020 These changing patterns also mean that the CPI, based on a fixed basket of goods, became a less accurate gauge of the inflation rate Canadian households were facing. Many households responding to our recent CSCE indicated that the prices they were paying for goods and services were rising more than the officially reported inflation rate. 13 At the Bank, we want to better understand this difference between perceived and measured inflation and are working with Statistics Canada to assess the impact of these shifts in spending patterns on CPI inflation. Overall, the results indicate that the decline in inflation experienced by consumers in April is a little less than that of the official CPI measure. Households are spending much less on some of the items whose prices are declining and vice versa. While many of these changes in spending patterns will reverse as businesses reopen, we expect some to persist. These consumption patterns will continue to affect the measurement of underlying price pressures through the recovery period until they stabilize and the weights are eventually adjusted. 12 The relatively high inflation rate for food in stores in 2019 reflects a combination of supply issues (bad weather, African swine fever), while for the other items it is due to the impact of tariffs imposed on Canada– US trade at that time. 13 While this is not something new, the difference between households’ perceptions in the second quarter of 2020 and April CPI inflation was particularly acute. -9At the Bank of Canada, we are mindful of the impact that these shifts in spending are having on measured CPI inflation because our 2 percent inflation target for monetary policy is defined in terms of the CPI. However, it is important to note two points. First, to gauge current underlying inflationary pressure in the economy we rely on our three preferred measures of core inflation, which limit the effect of volatile components such as gasoline. Second, when we conduct monetary policy, our focus is not primarily on CPI inflation today but on the forecast for CPI inflation in the future. Any policy action we take now typically takes six to eight quarters to work its way through the economy. For this reason, while we are trying to understand how the pandemic is affecting the composition of household spending and the prices of items such as gasoline and groceries today, we are most interested in whether these impacts will continue into the future. The persistence of these effects will largely depend on our ability to control the virus and the consequent effects on household confidence and spending. The housing market stalls The economic shock of the pandemic has also had a pronounced effect on expenditures on housing and the housing market itself. Housing market activity had picked up in the year before the outbreak after slowing in 2018 in response to higher interest rates, macroprudential stress-test measures designed to keep financial vulnerabilities in check and regional changes to housing regulations. As with consumption, both supply and demand forces drove the drop in spending on housing. On the supply side, activities related to buying and selling a house became much more difficult to do because of the physical distancing measures. On the demand side, a decline in employment, income and wealth, as well as increased uncertainty about the future, hurt confidence. 14 These factors led to a near closure of resale housing markets, with sales and listings both down sharply throughout Canada (Chart 8). However, declines were more concentrated in provinces that were quick to impose the most-stringent containment measures— Quebec, Ontario and British Columbia. 14 The declines in employment and income significantly reduced our estimated underlying demand for resales, which were down about 100,000 units in May from February. - 10 - Chart 8: Existing home sales tumble below underlying demand Seasonally adjusted annual rate, thousands of units Jan-2018 May-2018 Sep-2018 Jan-2019 May-2019 Sep-2019 Jan-2020 New listings (monthly, left axis) Resales (monthly, right axis) Estimate of underlying demand for resales (quarterly, right axis) Note: Underlying demand is estimated using the methodology described in M. Khan and T. Webley, "Disentangling the Factors Driving Housing Resales," Bank of Canada Staff Analytical Note No. 2019-12 (April 2019). Sources: Canadian Real Estate Association and Bank of Canada calculations May-2020 Last observation: May 2020 With sales and listings initially falling in tandem, the ratio of national sales to new listings—an important indicator of market conditions—remained near prepandemic levels (Chart 9). But this ratio fell back in May to within balanced market conditions as listings rebounded more strongly than sales. Consequently, measures of national average house prices that control for compositional changes have remained relatively stable (Chart 10). Still, there are notable regional differences beneath the national numbers. Ratios of sales to new listings in expensive markets such as Ontario and British Columbia have cooled, and prices for higher-end homes have declined. 15 However, the dynamic since February has generally resulted in slight reductions in the ratio of sales to new listings, with some exceptions (the ratio in Newfoundland and Labrador, British Columbia and Quebec has declined more than in other regions). If these conditions hold, we could see softer price growth in most markets in the months ahead. 15 The ratio of sales to new listings for Ontario cooled in April but recovered in May as sales rebounded. The opposite dynamic occurred in British Columbia, with the ratio of sales to new listings holding fairly steady in April and moving lower in May. - 11 Chart 9: Ratios of sales to new listings have declined more in some regions than others Ratio Chart 10: Home price indices that adjust for composition have held relatively stable over the containment period % Year-over-year growth not seasonally adjusted, monthly data Seasonally adjusted, monthly data -3 -6 -9 -12 10 year range Current ratio (May 2020) Pre-pandemic ratio (February 2020) Sources: Canadian Real Estate Association Last observation: May 2020 and Bank of Canada calculations -15 Teranet–National Bank National Composite House Price Index Aggregate Composite MLS Home Price Index MLS Average Resale Price Sources: Teranet-National Bank and Canadian Real Estate Association Last observation: May 2020 The market for existing homes wasn’t the only casualty of the containment measures as new home construction was severely curtailed across the country (Chart 11). For example, Quebec stopped all housing construction, while other provinces allowed projects already underway to continue. As a result, April housing starts declined 21 percent from their February level to an annualized 166,000 units nationally. As with resales, the largest declines were observed in the provinces with the severest restrictions: Quebec starts plunged to zero in April, and British Columbia and Atlantic Canada saw steep declines. In contrast, housing starts in the Prairies rose from February levels, as did housing starts in Ontario. But the resumption of new home construction in Quebec helped boost national housing starts to 193,000 units in May, leaving the level just 8.2 percent below that in February. - 12 - Chart 11: Indicators of monthly new construction declined in April as containment measures took effect, but have since partially rebounded Seasonally adjusted annual rate, monthly data Thousands of units Jan-2018 May-2018 Sep-2018 Jan-2019 Housing starts Sources: Canada Mortgage and Housing Corporation and Statistics Canada May-2019 Sep-2019 Jan-2020 May-2020 Building permits Last observation: May 2020 While housing market resales and new residential construction activity almost came to a halt in some provinces during the containment period, recent data indicate a partial bounce back due to the easing of containment measures, improved confidence and lower mortgage rates. Nonetheless, we expect some volatility and regional differentiation to persist given heightened uncertainty about the pandemic and its impact on economic prospects, including oil and other commodity prices. A crucial role for credit I’d like to now turn to the impact of COVID-19 on household borrowing and especially debt. In recent years, the Bank has highlighted in our Financial System Review that elevated household debt, primarily its distribution rather than its overall level, is a significant financial vulnerability because many households are highly indebted. We noted in our May FSR that these households may face severe difficulties servicing their debt if they suffer a persistent and material decline in income. About 20 percent of all mortgage borrowers do not have enough liquid assets to cover two months of mortgage payments. Since the COVID-19 crisis began, household credit growth has eased for two main reasons. First, as I mentioned earlier, various policy measures are helping indebted households cope with income losses and lowered the cost of servicing some existing debt. In addition, Canadian banks have allowed more than 700,000 households to delay mortgage payments for up to six months. Banks have also provided payment deferrals and interest rate relief on other products such as credit cards, auto loans and lines of credit (Chart 12). Together, these - 13 measures are helping to bridge income losses and are limiting the need for already-indebted households to turn to additional borrowing. 16 Chart 12: Banks have approved payment deferrals on a range of credit products Number of approved payment deferrals Number 700,000 600,000 500,000 400,000 300,000 200,000 100,000 HELOCs* Personal lines of credit Personal loans Auto loans Credit cards Mortgages Note: Deferrals include data from the six largest Canadian banks as well as from select smaller banks. Numbers are subject to revision as reporting methodologies continue to evolve. Source: Financial Consumer Agency of Canada * home equity lines of credit Second, shifts in household spending have also played an important role in limiting the need for additional borrowing. As discretionary spending has declined, so has the demand for credit typically used to make such purchases. This is especially true for big-ticket purchases such as cars. In April, consumer credit, which includes auto loans, declined by about 15 percent on a three-month annualized basis, marking one of its biggest drops on record (Chart 13). 17 16 Payment deferrals will themselves add modestly to debt as interest on deferred principal payments accrues. This increased debt will have a small impact on future monthly payments and any increase in monthly payments could be neutralized by extending the amortization period. However, households that defer will likely be living with their existing debt for longer, resulting in an increase in the overall amount of interest paid over the life of the loan. 17 Real estate secured credit has continued to reflect the pre-pandemic strength in housing activity. This is because a home purchase is reflected in credit data once the associated mortgage is funded, which typically occurs two to three months after the sales agreement itself. - 14 Chart 13: Household credit growth eased in April, reflecting an abrupt drop in consumer credit 3-month percentage change, at annual rates Apr-17 Total household credit Apr-18 Apr-19 Consumer credit Apr-20 % -2 -4 -6 -8 -10 -12 -14 -16 Real estate secured lending Source: Regulatory filings of Canadian banks Last observation: April 2020 Nevertheless, it is crucial that credit continues to flow to households, especially to those that need it. That is why the availability of credit has been a central focus of the Bank’s policies, especially at the outset of the crisis when financial markets and institutions were under stress as market liquidity dried up and bank funding costs rose. In March, we reduced our policy interest rate by 150 basis points to help ease these costs. These cuts have been passed through to most consumer interest rates, albeit to varying degrees, reflecting in part the effect of global factors, namely higher risk premiums. 18 We knew these rate cuts would not add much stimulus during the containment period since households were unlikely to borrow to boost consumption given elevated uncertainty and the supply constraints. But access to low-cost credit served as a bridge during the containment period and will be critical to support household demand once the recovery begins. Going forward, some vulnerable households are likely to fall behind on their loan payments if incomes do not recover by the time payment deferrals end. 19 Indeed, the longer income losses persist, the greater the likelihood that cash flow difficulties translate into a rise in insolvencies. The situation in energy-producing provinces is of particular concern, as households had already been under financial stress as a result of the 2015–16 decline in oil prices (Chart 14). 18 Since March 4, rates on fixed- and variable-rate mortgages have declined by 20 and 75 basis points, respectively. Rates on most lines of credit have declined by 100 basis points or more. 19 See O. Bilyk, A. T. Ho, M. Khan and G. Vallée, “Household Indebtedness Risks in the Wake of COVID-19,” Bank of Canada Staff Analytical Note No. 2020-8. - 15 Chart 14:Households in energy-intensive regions were experiencing financial stress before the pandemic Consumer insolvencies as a share of working-age population Moving 12-month sums expressed in deviations from historical averages % 0.3 0.2 0.1 0.0 -0.1 Alberta Saskatchewan Newfoundland and Labrador Source: Innovation, Science and Economic Development Rest of Canada -0.2 Last observation: March 2020 I should note that consumer insolvency filings have dropped sharply during the containment period. This reflects not only the income support measures I just discussed but also the fact that insolvency is ultimately a legal process that requires courtrooms to operate. Needless to say, we will be watching these data very closely in the months ahead. 20 Let me conclude my discussion of household borrowing by touching on one of the most-cited statistics—the ratio of household debt to disposable income. Some observers have stressed that this ratio is likely to increase in the near term, which poses a threat to financial stability. This increase should come as no surprise, as the denominator—household income—has declined with sharp decreases in employment and hours worked. The numerator—debt—is a stock variable that cannot change significantly in the short term. Nonetheless, we do not expect a sharp increase, in part, because of the government’s income replacement policies. Once we are through the containment period, we can better gauge how permanent the change is and what it means for the financial vulnerability associated with highly indebted households. The road ahead for household spending The recovery period has begun in all provinces as the containment measures are relaxed and economic activity is picking up. As I outlined earlier, we expect the recovery in economic activity and household spending to have two phases. The first phase, the reopening, will be a relatively rapid and strong pickup as some of the measures are lifted and households consume goods and services they could not buy during the containment period. But the recovery will be only partial. The second phase, the recuperation, is highly uncertain and thus will be more 20 It is, however, important to note that in the second quarter of 2020, Canada’s large banks increased provisions for credit losses to $11 billion (about half of which were attributed to consumer loans), up sharply from just $3 billion in the first quarter. - 16 prolonged and uneven. Consequently, it will take some time for employment, household income and confidence to return close to the pre-pandemic path. I would like to elaborate on these two phases. Initial phase of the recovery: reopening and partial rebound (B–C) In recent weeks, we have begun to see some signs that a recovery is underway across sectors (Chart 15). 21 In May, consumer confidence increased and motor vehicle sales rebounded sharply, both from low levels recorded in April. Housing resale activity is also picking up in major markets, and employment has started to recover. These early indicators suggest that the trough in economic activity and household spending occurred in April and that the more severe outcome depicted in our April Monetary Policy Report has been avoided. Fiscal and monetary policy actions have underpinned this nascent rebound in demand. Along with spending on housing, spending on durable and semi-durable goods, such as motor vehicles and clothing, is expected to lead the rebound in household consumption in the near term. In particular, demand for interest-ratesensitive durables such as motor vehicles could be relatively strong initially, supported by low borrowing costs. 22 Chart 15: The share of fully open businesses is on the rise % a. Goods b. Services 71.1 47.4 52.6 % 31.4 Goods Natural resources Manufacturing Agriculture Construction Services Retail Arts, recreation and information Social services Note: The Canadian Federation of Independent Business has conducted 13 weekly surveys. The dates on the x-axis of this chart correspond to the survey dates for each of these surveys. Survey 13 (June 12-TBD) is ongoing, so the data for that week presented above are preliminary. The member survey focuses on small businesses, with 96% employing less than 50 employees. For a more detailed description of the membership see https://www.cfib-fcei.ca/en/about-us#our-members. 21 Retail stores that have an outdoor-facing entrance have been permitted to operate as long as they adhere to physical distancing guidelines, and malls have recently reopened in much of Central Canada. Most construction and manufacturing operations have also been permitted to resume. In contrast, tourism-related activities remain severely constrained, and most service sector businesses continue to operate strictly through telework. 22 T. Chernis and C. Luu, “Disaggregating Household Sensitivity to Monetary Policy by Expenditure Category,” Bank of Canada Staff Analytical Note No. 2018-32 (October 2018), find that automobiles, other transportation and furniture have proven historically to be most sensitive to changes in monetary policy. - 17 - There could also be pent-up demand for services that are less time-critical, such as personal care and out-patient health services, and these should quickly bounce back to pre-containment levels. Interac data that show an upturn in barber and hair salon payments late in May corroborate this expectation (Chart 16). Chart 16: Interac transaction data indicate that activities idled by the containment have resumed Daily data, index: January 7, 2020 = 100 Index Jan-20 Source: Interac Feb-20 Mar-20 Clothing stores Apr-20 Barbers and hair salons May-20 Last observation: May 21, 2020 Next phase of the recovery: slow and gradual recuperation, reflecting heightened uncertainty (C–D) The willingness of households to spend after this initial phase will depend on many factors, including the recovery in employment, income and confidence and the possibility of future outbreaks. While the drop in employment has been severe, there are some positive signs. The hardest-hit sectors, such as restaurants and retail, typically have a high degree of employee turnover because they employ more mobile workers. That may make it easier for firms to rehire when operations resume. Job loss was also less significant among those with a higher education, which could limit skills attrition. And finally, a sizable share of the decline in total labour input was from temporary layoffs and cuts to working hours. That suggests more attachment to former employers, so the recovery could be fairly strong (Chart 17). - 18 Chart 17: A large share of job losses stems from temporary layoffs Share of change in non-employment by reason, April 2020 vs. February 2020, not seasonally adjusted, monthly data All separations 58% Youth 77% Prime-age Seniors 43% 41% 55% 38% -10% 0% 10% 20% 30% 40% 50% Job leaver, retired Job loser, permanent layoff 45% 41% 60% 70% 80% 90% Job loser, temporary layoff 100% 110% Other* *Other includes all other reasons for job separations, including illness, personal or family reasons, school and those not working over the past year, among others. Last observation: May 2020 Sources: Statistics Canada and Bank of Canada calculations But more persistent disruptions in the job market could slow the recovery during the recuperation phase. There have been permanent layoffs among lowerincome workers in energy-producing regions, where the economic activity was already struggling to regain momentum. Service industries where physical distancing is difficult have also been hard hit, and that is disproportionately affecting women, who are also more likely to be grappling with a lack of childcare. Permanent firm closures and corporate bankruptcies as well as a weak global recovery will also restrain growth in employment and in household income and spending. The housing market may also face headwinds beyond the early lift in activity we have started to see. For example, immigration was playing a key role in boosting housing demand before the pandemic. This source of demand could take some time to be restored as authorities clear backlogs and travel restrictions are gradually eased across the world. Fiscal measures should continue to buffer income losses and support household spending during the second phase of the recovery, particularly because they are flexible and can adjust as needed. According to our survey of consumer expectations, respondents said they spent or expect to spend about 70 percent of these benefits, on average. 23 Recent data also show a rise in savings, which supports the notion of pent-up demand. The household savings rate rose from 3.6 percent in the fourth quarter of 2019 to 6.1 percent in the first quarter of this year. In addition, April saw an unprecedented increase in deposits in personal bank accounts, consistent with higher savings continuing into the second quarter (Chart 18). Some of the higher savings may be the result of the decline in discretionary spending by some households on services, motor vehicles and clothing. Without restaurants or 23 With most of the fiscal support flowing through transfers (CERB) rather than through wage subsidies (CEWS), some people may temporarily lose the incentive to return to work. - 19 movie theatres to go to, money simply accumulated in household bank accounts. Some of this accumulation may, however, represent a deliberate choice by many Canadians to save more as a precaution, given the higher uncertainty about the future. These precautionary savings could be converted into more consumption if confidence improves as the economy is reopened and the virus is controlled. Of course, there are sizable differences in financial circumstances across households. We are mindful that many lower-income families who have lost their jobs are having difficulty making ends meet. They may be dipping into their savings or taking on more debt to simply buy necessities. 24 Chart 18: Deposits in personal bank accounts rose sharply in April Monthly growth in chequeable and non-chequeable deposits % Source: Regulatory filings of Canadian banks -1 Last observation: April 2020 The recovery of services subject to a more gradual removal of containment measures, such as travel services, is expected to be more protracted. The rebound in services that are usually consumed in crowded environments, such as restaurant meals as well as cultural and sporting events, should also be limited by capacity constraints. We expect that the recovery will vary by region because containment measures are being lifted at different times across Canada (Chart 19). This staggered reopening of establishments and manufacturing facilities across the country adds an additional layer of uncertainty in estimating the path of the recovery in overall household spending. For example, Ontario made more frequent announcements but pursued a more gradual reopening than Saskatchewan and Alberta, where a greater share of businesses opened sooner. 24 J. C. MacGee, T.M. Pugh and K.G. See, “The Heterogeneous Effects of COVID-19 on Household Consumption, Debt and Savings” Bank of Canada Staff Analytical Note (forthcoming), examine the impact of the pandemic and various policy measures on households with different income levels and find that the bulk of the savings likely accrued to the top 20 percent of Canadian income earners while the savings of lower income earners declined. - 20 Chart 19: Reopening announcements have been staggered across provinces PE NL NS NB QC ON MB SK AB BC April May May May May May May May May May May May May June June June June June June Note: Each marker represents a date corresponding to an announced reopening of stores, manufacturing facilities and service-related establishments. Source: Provincial news releases Looking ahead, the pandemic may also accelerate some of the structural changes related to spending that were already underway. Since some consumers—seniors in particular—may have tried online shopping or food delivery for the first time during the pandemic, they may continue that habit going forward. This increasing trend toward online shopping and food delivery has made the economy more resilient through the downturn and could help support the recovery once it is underway. In summary, various, often opposing, forces will influence the pace, strength and breadth of eventual recovery in household spending and economic activity from this unprecedented downturn. Consequently, the uncertainty around this recuperation stage is extraordinary and points toward a recovery that will be gradual and long-lasting as this uncertainty slowly dissipates and household confidence is restored. In the meantime, households are likely to remain cautious in their spending behaviour as they adjust to a new “post-pandemic” normal. 25 Conclusion The COVID-19 pandemic has had unprecedented and very serious effects on the Canadian economy and on Canadian households, and the aftershocks will likely continue for some time. Recent data indicate that a recovery has begun and that a more severe outcome has been averted, thanks to an extraordinary set of actions taken by the federal and provincial governments and the Bank of Canada. 25 About 80 percent of the recent CSCE respondents indicated that they think it is unlikely that life will return to the way it was before the outbreak. More than 70 percent of them expect to engage in social activities less often or not at all if containment measures are lifted but there is no vaccine or medication for the virus. These findings suggest that the effects on household spending behaviour from the COVID-19 experience will likely persist for some time. - 21 Still, the path ahead for households is likely to be protracted and uneven. The lifting of restrictions on economic activity will be gradual and will differ across sectors and provinces. Cautious spending behaviour on the part of households will likely continue until a vaccine becomes available as uncertainty about the virus remains, including concerns about future outbreaks. Consequently, employment and income will likely take some time to recover fully. The Bank of Canada is prepared to take the necessary actions to support the financial system and to underpin the recovery to achieve our 2 percent inflation target within a reasonable time frame. Importantly, our policy actions will complement those taken by the government. Fiscal policy is better able to target the needs of vulnerable households and specific sectors and regions of the country and can be scaled to provide sufficient support. Together, our determined efforts will help our economy overcome the effects of the pandemic and achieve strong and sustainable employment and output growth for the benefit of all Canadians.
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Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, to the Canadian clubs and cercles canadiens, Ottawa, Ontario, 22 June 2020.
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Tiff Macklem: Monetary policy in the context of COVID-19 Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, to the Canadian clubs and cercles canadiens, Ottawa, Ontario, 22 June 2020. * * * Introduction Good morning. I am very pleased to be with you for my first public event as Governor of the Bank of Canada. The COVID 19 pandemic has upended many of our ways of doing things, including speaking in person to large groups. Fortunately, we can take advantage of technology so I can speak to every Canadian club and cercle canadien, and hear directly from your members right across the country. Thank you for the invitation. COVID 19 is a human tragedy that has precipitated an economic catastrophe, the likes of which we have not experienced in our lifetimes. Entire sectors of the economy have been shuttered. More than 3 million people lost their jobs through April, while another 3.4 million were working less than half of their usual hours. The pandemic is challenging millions of Canadians. It also poses challenges for those involved in setting economic policy. For roughly 30 years, Canada has been well served by monetary policy based on inflation targeting. Through this economic crisis, the inflation target remains our beacon. But structurally low interest rates and the scale of the COVID 19 shock are having a profound impact on how we implement our monetary policy framework. Before we get to the question and answer period, I want to talk about the essential ingredients of this framework and the ways that the pandemic is affecting how we operate. I only have time to skim over some of these topics, so I hope we can have a fuller discussion later on. The right framework Our monetary policy framework is designed to deliver low, stable and predictable inflation. This is the best contribution we can make to Canada’s economic welfare. That’s because low, stable and predictable inflation lays the foundation for sustainable economic growth. And keeping inflation near to its target means the economy is running close to capacity with full employment. It’s important to note that our framework is set out in an agreement established with the government and renewed every five years. This sends an important signal that the democratically elected government and the Bank agree on our policy goal. And it gives the Bank the operational independence to pursue that goal. This enhances our credibility and gives Canadians more confidence that we will achieve the inflation target. We now have an established track record of success with inflation targeting, which reinforces its effectiveness. As I said, the inflation target is really a beacon to guide our policy. By grounding our actions in our framework, we will always be working toward bringing the economy near capacity with full employment. Policy and the pandemic A successful inflation-targeting monetary policy framework has a number of core ingredients. Clearly, we need to agree on a measure of inflation to target. We need to assess how much demand is in the economy relative to its productive capacity or supply. We need tools to influence demand, or spending, and bring it in line with supply. We also need an outlook for the economy because it takes time for our tools to affect spending and inflation. And because there are many unknowns, we need an understanding of the risks to the outlook. 1/4 BIS central bankers' speeches These are the basic ingredients of inflation targeting. And COVID 19, combined with structurally low interest rates globally, is affecting all of them. A measure of inflation Let’s start with our measure of inflation. Our target is the 12-month rate of change in Statistics Canada’s consumer price index (CPI)—the most common and comprehensive inflation measure out there. We target the 2 percent midpoint of a 1 to 3 percent range for the annual inflation rate. But in any given month, the CPI can be quite volatile and not reflect its long-term trend. That’s because prices of items such as fresh fruit and vegetables or gasoline can jump around a lot, affecting the CPI. So, we look at several specific measures of core inflation to get a better sense of the underlying trend in inflation. Total CPI is weighted to reflect the buying patterns of the average Canadian household. In normal times, for example, Canadians spend a lot more on gasoline than on alcohol, so gasoline has a larger weight in the index. But these aren’t normal times. Because of the pandemic, Canadians are spending much less on gasoline and air travel, and more on food purchased from stores. And until very recently, they weren’t spending anything on haircuts. The implication is that the CPI isn’t fully reflecting people’s current inflationary experience. Bank staff have been working with Statistics Canada to better understand the implications of these shifts in spending patterns. As the economy reopens, many of these shifts will unwind. We will be working to look through temporary shifts while capturing any more enduring changes. Supply and demand The pandemic has also greatly complicated supply and demand. To see how, let’s first consider the economy’s capacity to produce goods and services. At the onset of the pandemic, Canadians were subject to necessary and strict containment measures to slow the spread of the coronavirus. Physical distancing practices and stay-at-home orders quickly made some types of work impossible. Most non-essential workplaces were closed, putting a stop to many jobs that cannot be done remotely. This resulted in a massive decline in supply. Now, containment measures are being lifted, and this is restoring some degree of supply. However, continued physical distancing may mean workplaces cannot be as productive and many services will be very difficult to deliver. Further, the reopening is happening unevenly across the country, across industries and around the world. This will disrupt supply chains and affect both the volume and the prices of our exports. The coronavirus may lead to lower levels of immigration, limiting workforce growth. More generally, some industries won’t reopen until we have a vaccine or at least very effective anti-viral medications. This suggests the economy’s productive capacity will take a hit that will persist even after the containment measures are lifted. On the demand side, consider the millions of Canadians who have either lost their jobs or seen their hours scaled back. This represents a very large drop in spending power across the economy. Fortunately, the government’s fiscal measures have been scaled to replace the labour income lost throughout the economy, laying the foundation for recovery. But spending has fallen sharply since the pandemic hit. As Deputy Governor Larry Schembri pointed out in a speech last week, this is not only because there have been fewer things to buy, but also because there has been a sharp drop in consumer confidence. Until people are back at work and feel more confident, they will remain cautious with their spending. It will be crucial to understand how much supply and demand have been damaged by COVID 19, and how both will recover in the coming quarters. As the economy reopens, we should see very strong job growth. We should also see some pent-up demand giving a boost to spending. But not 2/4 BIS central bankers' speeches everyone’s job will come back, and uncertainty will linger. As a result, we expect the quick rebound of the reopening phase of the recovery will give way to a more gradual recuperation phase, with weak demand. If, as we expect, supply is restored more quickly than demand, this could lead to a large gap between the two, putting a lot of downward pressure on inflation. Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work. Policy tools Let me now turn to our monetary policy tools. In normal times, we deliver or withdraw stimulus as needed by adjusting our target for the overnight interest rate. That one-day interbank interest rate generally doesn’t affect consumers directly, except those with variable-rate mortgages. But changes in the overnight rate affect borrowing costs further out on the yield curve, which is where most consumers and businesses borrow. At the onset of the pandemic, we could see that there would be a huge hit to confidence. So, back in March, the Bank rapidly lowered our policy interest rate to 0.25 percent. This action was not really expected to boost spending in the early days of the pandemic. Its immediate purpose was to help support confidence and provide some interest rate relief. But as more retail businesses reopen, low interest rates will help support spending. The policy rate is now at its effective lower bound. Some central banks have taken their policy rates below zero. We feel that bringing that rate into negative territory could lead to distortions in the behaviour of financial institutions. However, the Bank has a number of other tools we can use to help stimulate demand. The Bank has launched a series of purchase programs that involve buying different types of assets. We have launched programs to buy Canada Mortgage Bonds, commercial paper, bankers’ acceptances, corporate bonds, and provincial and federal government debt. We introduced these programs to make sure that key markets would function properly, and that credit would continue to flow. Credit is the lifeblood of market-based economies. During a crisis, it is imperative that central banks maintain access to credit in order to avoid a credit crunch. When markets aren’t functioning properly, the ability of monetary policy to provide stimulus also breaks down. But financial markets are now working considerably better. With this improvement, our asset-purchase programs are becoming a source of monetary stimulus. The Bank has committed to buying at least $5 billion of Canadian government bonds a week until the recovery is well underway. As these large-scale asset purchases build up, they are delivering stimulus through a process that is often called quantitative easing, or QE. Here’s how it works. Purchases of government bonds help to lower their yields. With funding markets now functioning properly, our weekly purchases also make borrowing cheaper for households and businesses. For example, as our purchases lower the yield on five-year government bonds, this is being reflected in cheaper fixed-rate mortgages. QE can also send a signal that our policy interest rate is likely to remain low for a long period. By giving more certainty about the path of short-term interest rates, this can help lower longer-term borrowing costs for households and businesses. The Bank is also buying private assets, including corporate bonds. We started these purchases of corporate bonds because of strains in this market. To date, purchases have been limited, but market conditions have improved. This type of program also provides stimulus by providing liquidity, helping to narrow the difference between corporate and government bond yields. By reducing the premium that corporations have to pay relative to governments, we are lowering interest rates for businesses. This is often called credit easing, or CE. 3/4 BIS central bankers' speeches At our last interest rate announcement, on June 3, we indicated that with market functioning improved and containment restrictions easing, our focus is shifting to supporting output and employment. We also reiterated our commitment to continue large-scale asset purchases until the economic recovery is well underway. With market functioning restored, these purchases are working through more channels to deliver stimulus. Any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target. Outlook and risks The pandemic has created a fog of uncertainty, and this has greatly complicated our ability to generate a clear outlook for growth and inflation. The course of the coronavirus is the biggest source of uncertainty. Beyond that, we don’t know how global trade and supply chains will evolve, or what will happen with domestic supply and demand. We don’t know how consumer and business confidence will rebound, or whether the pandemic will lead to lasting changes in savings and spending habits. With the economy at least stabilizing, we are starting to get some line of sight, and as more data arrive, we can begin to answer some of these questions. In our July Monetary Policy Report, we expect to be able to provide a central planning scenario for output and inflation, with a discussion of the main risks around that scenario. Going forward, we will assess incoming information relative to that scenario. Currently, we expect growth to resume in the third quarter. The economy will get an immediate boost as containment measures are lifted, people are called back to work, and households resume some of their normal activities. But it will be important not to assume that these growth rates will continue beyond the reopening phase. The pandemic is likely to inflict some lasting damage to demand and supply. The recovery will likely be prolonged and bumpy, with the potential for setbacks along the way. The message I want to leave you with is that while we are using different tools in these extraordinary times, our policy remains grounded in the same framework. The inflation target is our beacon that is guiding our actions as we help bring the economy from crisis, through reopening, to recuperation and recovery. With that, let me stop and open the floor to your questions. I look forward to a good discussion. 4/4 BIS central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 15 July 2020.
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Tiff Macklem: Release of the Monetary Policy Report Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 15 July 2020. * * * Good morning. Senior Deputy Governor Wilkins and I are pleased to be with you to answer your questions about today’s policy announcement and Monetary Policy Report (MPR). The COVID-19 pandemic has caused an unprecedented fall in economic activity in Canada, and the recovery will require considerable monetary policy support. Our overriding message to Canadians is that the Bank will be there to provide monetary stimulus for an extended period to support the recovery and return inflation to its 2 percent target. Before I turn to your questions, let me say a few words about the key points of the Governing Council’s deliberations. The coronavirus continued to dominate our discussions. The pandemic is a human tragedy and an economic calamity that is taking lives and livelihoods. In the first half of the year, the global economy faced its biggest decline since the Great Depression. As measures to contain the virus are lifted in many places, economic activity is starting to pick up. However, as we are seeing in the United States, flare-ups of the virus can mean the reimposition of containment measures, impeding the recovery. We are facing many uncertainties, the biggest of which is the unknowable course of the virus itself. As a result, we cannot forecast with the usual degree of accuracy in our economic projections. Recognizing this, we decided to present a central economic scenario. The central scenario tries to balance the likelihood of better and worse outcomes, but it is highly conditional on our assumptions about the virus. In particular, we assume there will not be a broad-based second wave here in Canada and that most containment measures are lifted gradually. We also assume that the pandemic will have largely run its course by the middle of 2022, because either a vaccine or an effective treatment is widely available by then. Our policy discussions were guided by this scenario, while recognizing the extreme uncertainty around these assumptions. In the central scenario, the Canadian economy shrinks by almost 8 percent this year, then grows by just over 5 percent in 2021 and almost 4 percent in 2022. Now, let me give you some context. Recent monthly data—particularly on employment, motor vehicle sales and housing—suggest that the Canadian economy hit bottom in April. Job growth resumed in May and accelerated in June. We now estimate that the economy contracted by about 15 percent in the first half of this year. As deep as this is, it suggests the economy has avoided the most dire scenarios we laid out in the April MPR. In the third quarter, we expect to continue to see a strong rebound in jobs and output. However, it was clear to everyone on the Governing Council that this is not a normal recession. We agreed that the exceptionally strong near-term growth of the reopening phase is likely to give way to a slower and bumpier recuperation phase. As a result, it will take a long time for economic activity to get back even to the level where it was at the end of 2019, before the pandemic struck. There are many reasons why the recuperation phase may be protracted. Some businesses will close, while others will be unable to return to pre-pandemic activities. Business and consumer confidence have been shaken, and consumers are likely to remain cautious with their spending. 1/2 BIS central bankers' speeches And many people may find it hard to return to work particularly if schools and child-care facilities cannot fully reopen. We recognize that the burden of this challenge falls disproportionately on women. At the start of the pandemic, as containment measures were put in place to flatten the curve, the government stepped in quickly to replace lost income and help businesses retain their staff and pay their bills. Some of these supports have been extended, and more have been announced since early June. These measures have buffered households and businesses from the worst effects of the pandemic and laid the foundation for recovery. The Bank’s actions were also unprecedented. We lowered the policy rate to the effective lower bound of 25 basis points and launched a range of liquidity facilities and purchase programs to keep markets functioning. This kept credit flowing and supported confidence. With core markets normalizing, we have scaled back some of the short-term liquidity facilities, but we are ready to step up our programs if warranted. As always, our policy actions are grounded in our inflation-targeting mandate. The pandemic is imposing uncertainty on inflation, too. Because spending patterns have changed, the consumer price index (CPI) doesn’t accurately represent the spending habits of Canadians right now. So, the Bank has been working with Statistics Canada to create an adjusted price index that better captures today’s consumption patterns. We talk about this work in Box 2 of the MPR. The adjusted price index shows that inflation is probably not as low as the official CPI suggests, although the difference is not large. In the past couple of months, inflation by either measure has been close to zero. We expect it to remain below target while low prices for gasoline, travel, clothing and other items are pulling it down, and while demand is weak. The pandemic has reduced both supply and demand in the economy, but we judge that the effects on demand are larger. As demand recovers and economic slack is absorbed, inflation will gradually move back up towards our 2 percent target. The Governing Council also discussed the role our extended toolkit is playing to support the economy. Our purchase programs were initially aimed at improving market functioning and unclogging the financial system, allowing the monetary policy transmission mechanism to work. With that objective largely achieved and the economy reopening, these programs—particularly the large-scale purchases of Government of Canada bonds—are now working through more channels, which we elaborate on in the MPR. The combination of the very low policy rate and asset purchases is providing considerable monetary stimulus. To sum up, the Canadian economy has been hit by a historic shock, which has demanded a historic policy response. The early signs from the reopening phase are positive, but we expect the recuperation phase to be bumpy and protracted. As the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In addition, to reinforce this commitment and keep interest rates low across the yield curve, the Bank is continuing its large-scale asset purchase program at a pace of at least $5 billion per week of Government of Canada bonds. This QE program is making borrowing more affordable for households and businesses and will continue until the recovery is well underway. To support the recovery and achieve the inflation objective, the Bank is prepared to provide further monetary stimulus as needed. With that, Senior Deputy Governor Wilkins and I will now be happy to take your questions. 2/2 BIS central bankers' speeches
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Remarks (delivered via webcast) by Mr Lawrence Schembri, Deputy Governor of the Bank of Canada, to the Canadian Association for Business Economics, Kingston, Ontario, 25 August 2020.
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Remarks by Lawrence Schembri Deputy Governor, Bank of Canada Canadian Association for Business Economics August 25, 2020 Delivered via webcast Perceived inflation and reality: understanding the difference “All our knowledge has its origins in our perceptions.” —Leonardo da Vinci Introduction Good afternoon. It is a pleasure to once again have this opportunity to speak at CABE’s annual late-summer conference, although the circumstances have changed radically since I last spoke a few years ago. The COVID-19 pandemic has disrupted all our lives and imposed much hardship on many. When I was last with you, we were on the top floor of a Kingston hotel overlooking Lake Ontario. I felt tested to hold your attention given the lovely view. Today, I’m similarly challenged, but by a virtual platform, made necessary by the serious health threat posed by the virus. The topic I’ll be addressing is inflation. It is a subject that central bankers never tire of talking about, since low and stable inflation is the core objective of the Bank of Canada’s monetary policy mandate. I would like to offer a slightly different perspective to engage your interest— namely, the difference between how people perceive inflation versus the actual measured rate. This issue is important because individuals’ perceptions of inflation today—and their expectations of it for the future—influence their spending and saving behaviour, and thus affect overall macroeconomic outcomes. Moreover, inflation expectations have significant implications for the credibility of our 2 percent inflation target and for the effectiveness of monetary policy. I would like to explore with you the observation that consumers, on average, think inflation is higher than what is measured and reported by statistical agencies. I would like to thank Patrick Sabourin and Rolande Kpekou Tossou for their help in preparing this speech. Not for publication before August 25, 2020 1:30 pm Eastern Time -2This gap has been regularly observed in Canada as well as in other jurisdictions, such as the United States and the United Kingdom.1 Recent public outreach conducted by the Bank has provided further evidence of this gap. As part of the process leading up to the renewal of our inflation-control target agreement with the federal government in 2021, we have sought out and are listening to the views of the public and other key stakeholders. One of the messages we have heard is that many people feel that the official consumer price index (CPI) inflation rate does not reflect the higher inflation they believe they are facing. This gap between perception and measurement has been more pronounced during the pandemic. In the most recent Canadian Survey of Consumer Expectations (CSCE) conducted this past May, respondents indicated that they expected inflation to increase in the short term. In fact, the CPI inflation rate declined sharply over this period and has been below our 1 to 3 percent inflationcontrol range.2 To examine possible explanations for this gap, the Bank has been conducting joint research with Statistics Canada. In this speech, I will share with you some of the preliminary results before we publish our official findings this fall. And so today, I would like to do three things: • • • first, illustrate and characterize this gap; second, explore some measurement and behavioural explanations of this disconnect between perception and reality; and third, examine the implications for monetary policy, including communications to different audiences. Low and stable inflation promotes economic prosperity Economists define inflation as a sustained increase in the general price level of goods and services in an economy over a period of time. While this concept of inflation seems straightforward, measuring inflation accurately is difficult. The CPI inflation rate is designed to track how much the average Canadian household spends and how that changes over time. To this end, Statistics Canada uses its Survey of Household Spending to estimate the shopping basket 1 See, for example, S. Axelrod, D. Lebow and E. Peneva, “Perceptions and Expectations of Inflation by U.S. Households,” Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series No. 2018-073 (October 2018) and S. Tenreyro, “Understanding Inflation: Expectations and Reality” (speech given at the Ronald Tress Memorial Lecture, Birkbeck University of London, London, England, July 10, 2019). 2 One explanation for the higher perceived inflation during the pandemic containment period is that households shifted their spending toward items that experienced higher price increases (e.g., food) and away from items that saw lower price increases or declining prices (e.g., gasoline). See Bank of Canada, “Box 2: Adjusted CPI inflation shows only slightly less decline than CPI inflation,” Monetary Policy Report (July 2020): 18. Another explanation is that price increases have an outsized impact on household perceptions of inflation. -3of a representative household. This basket consists of about 700 goods and services that Canadians typically buy, each with their own weight.3 Measuring CPI inflation is also very important for us at the Bank. We firmly believe that keeping inflation low, stable and predictable is the best contribution monetary policy can make to promoting the economic and financial well-being of Canadians. Our inflation target of 2 percent is defined in terms of the annual CPI inflation rate. This widely reported rate holds us to account because our performance can be easily assessed against it. The Bank has had a good track record of achieving our target. Inflation has averaged close to 2 percent since we established this specific target in 1993, and it has been very stable since.4 But it’s more than just a number. Achieving our target on a continuing basis contributes to rising standards of living for all Canadians. When people and businesses feel confident that they know what the rate of inflation will be, they can make better long-range plans for their careers, their savings and their investments. Moreover, when low inflation is well maintained, price signals are more meaningful. Markets and the overall economy function better. And this leads to stronger and more stable employment and output growth. Our success in achieving our 2 percent target, however, depends on many factors—and one of the most important is the public’s inflation expectations. Having a policy target that is well understood and trusted by Canadians helps keep inflation on target. Inflation perceptions and expectations Let’s turn our attention now to the main issue I would like to address today: the discrepancy between the measured rate of inflation and what some individuals perceive inflation to be. As I mentioned earlier, the average consumer tends to think they are facing higher inflation than both measured inflation and our target. We know this because we began to collect the views of Canadian households about inflation in 2014 through the CSCE I mentioned earlier. This survey asks individuals what they think the inflation rate is now and what they expect it to be in the future. Let’s look at some observations from the most recent CSCE (Chart 1), which are typical of past surveys. 3 Each item in the basket is given a weight that depends on how much a typical household spends on that item. The weights in the CPI basket are currently fixed for two years. This approach helps to obtain a consistent measure of pure price change. 4 Since 1993, the CPI inflation rate has been within our 1 to 3 percent target range about 80 percent of the time. -4First, we see that consumers’ perceived inflation rate today is generally above the actual CPI inflation rate, but reasonably close to our 2 percent target.5 Second, there is a correlation between current perceptions and future expectations of inflation at both the one- and five-year horizons. For example, if consumers think prices have notably increased in the last 12 months, then there is a good chance they will expect inflation to stay high in the future. Finally, the difference between expected inflation and current inflation (as well as relative to our target) increases as the horizon is extended from one year to five years.6 Chart 1: Households perceive inflation to be higher than official measures % 2014Q4 2015Q4 2016Q4 2017Q4 Bank of Canada inflation-control target Current perceptions of inflation Five-year-ahead inflation expectations Sources: Statistics Canada and Bank of Canada 2018Q4 2019Q4 Actual CPI One-year-ahead inflation expectations Last observation: 2020Q2 As an aside, it is noteworthy that a comparison of the CSCE with a similar survey published by the New York Federal Reserve Bank finds the perception gap is smaller and less dispersed in Canada than in the United States (Chart 2a and Chart 2b). This difference may reflect the impact of different communication strategies by the Bank of Canada and the US Federal Reserve.7 5 It is important to note that this gap is observed, on average, across Canadian households. The gap is larger for some groups—for example, younger households. 6 The higher expected inflation rate at the five-year horizon might reflect increased uncertainty about inflation outcomes, as suggested by relatively lower response rates. We also observe a greater degree of dispersion among respondents at this horizon. 7 Bellemare et al. (2019) conjecture that the narrower gap in Canada might be related to the Bank’s success with and focused communications on the 2 percent inflation target, creating a focal point for perceptions and expectations at 2 percent. In Bellemare, Kpekou Tossou and Moran, “The Determinants of Consumer's Inflation Expectations: Evidence from the US and Canada,” (unpublished manuscript, Department of Economics, Université Laval, July 1st, 2020), LaTex. -5Chart 2a: Inflation forecast errors are larger in the United States than in Canada % -1 2013Q3 2014Q3 2015Q3 2016Q3 2017Q3 2018Q3 Canada one-year-ahead inflation expectations Canada inflation realization, one year later United States one-year-ahead inflation expectations United States inflation realization, one year later Sources: Statistics Canada, Federal Reserve Bank of New York Survey of Consumer Expectations, US Bureau of Labor Statistics, and Bank of Canada Last observations: inflation expectations, 2019Q2; inflation realization, 2020Q2 Chart 2b: Inflation expectations in the United States are more skewed to the upside Distribution of one-year-ahead inflation expectations, United States versus Canada % Below -3 (-3,0] (0,1] (1,2] Canada (2,3] (3,4] (4,5] (5,6] Above 6 United States Sources: Federal Reserve Bank of New York Survey of Consumer Expectations and Bank of Canada Last observations: Canada, 2020Q2; United States, October 2019 Interestingly, Canadian firms and financial market participants expect inflation to be closer to the 2 percent target (and to actual measured CPI) than Canadian consumers do (Chart 3). They have a stronger incentive to obtain a more accurate outlook because they set prices and wages and take positions based on what they expect inflation to be. -6Chart 3: Inflation expectations of firms and professional forecasters have been closer to target than those of consumers % 2014Q4 2015Q4 2016Q4 2017Q4 2018Q4 2019Q4 Bank of Canada inflation-control target Firms' two-year-ahead inflation expectations Professional forecasters' two-year-ahead inflation expectations Households' two-year-ahead inflation expectations Note: Firms' expectations are from the Bank of Canada Business Outlook Survey, a quarterly survey that interviews business leaders from about 100 firms to gather a broad range of economic perspectives. The professional forecasts are from Consensus Economics, which gathers macroeconomic forecasts that are provided by leading economists. Sources: Bank of Canada and Consensus Economics Last observation: 2020Q2 It is also possible that consumers no longer see the benefit of closely monitoring inflation. Such behaviour, known as “rational inattention,” likely reflects the economic environment in Canada, where inflation has been low and stable over the last 25 years.8 All this being said, the gap between Canadians’ expectations of inflation—and this includes those of consumers, firms and market participants—and our inflation target has been relatively small. These well-anchored expectations have supported our ability to achieve the 2 percent target. Nonetheless, as a central bank, we don’t take for granted that inflation expectations are anchored at the target. The credibility of our target is of paramount importance. Consequently, it’s valuable to gain insights into why some households have a perception gap. Explaining the gap between perceived and measured inflation Measurement issue 1: representativeness of the CPI consumption basket One explanation for this gap is that consumers may not feel that the CPI consumption basket represents the goods and services they consume. In other words, they may feel that their consumption basket is different from the average. Or they may think their own purchases have risen in price by more than those in the CPI basket. In particular, the CSCE found that certain groups of consumers perceive an inflation rate materially higher than what Statistics Canada reports. 8 For more information, see C. A. Sims, “Chapter 4: Rational Inattention and Monetary Economics,” Handbook of Monetary Economics 3 (2010): 155–181. -7In our joint research with Statistics Canada, we explored this discrepancy by constructing the consumption basket and inflation rate for different groupings of households, based on income, education, age and renters versus owners. Our general finding is that the inflation rates constructed for specific consumer groupings are similar to the measured CPI inflation rate.9 Simply put, the perceptions of these groups were not consistent with our results. To illustrate this point, let’s take age as an example. We constructed different CPI baskets for young, middle-aged and senior households and calculated inflation rates for each group (Chart 4). The results show that, regardless of the different composition of their baskets, each age group’s average inflation rate tracked very closely to actual, measured CPI.10 Chart 4: Household-level inflation by age group is very similar Year-over-year percentage change % 2015Q1 Source: Statistics Canada 2016Q1 2017Q1 2018Q1 2019Q1 Household-level inflation, ages 18–30 Household-level inflation, ages 31–54 Household-level inflation, ages 55+ Household-level inflation, all ages 2020Q1 Last observation: 2020Q1 Taking this analysis further, let’s go back to the perceptions reported in the CSCE for each age group. Chart 5 clearly shows that younger consumers have much higher and more volatile inflation expectations than the two other age groups, and certainly higher than the measured rate. 9 While this finding generally holds, low income households and renters have experienced a modestly lower rate of inflation compared with the average Canadian household over the last five years (on average about 0.2 percentage points). The lower inflation rate for these groups can be explained by the fact that they spend a larger share of their basket on rent but a smaller portion on child care and housekeeping services, and the price of rent has been growing by less than that of child care and housekeeping services. This effect has been offset somewhat by their larger share spent on food, which has experienced higher rates of price increases. Despite the lower measured inflation rate for these groups, their perceived inflation rates are somewhat higher than the CPI inflation rate. This difference may reflect behavioural factors. 10 Statistics Canada compiled a Consumer Price Index for Seniors (CPI-S) from January 2013 to August 2018 and obtained a similar result. For more details, see C. Michaud, “Development of a Consumer Price Index for Seniors,” Statistics Canada Prices Analytical Series (June 20, 2019). -8Chart 5: Youth have higher and more volatile perceptions of inflation % 2014Q4 2015Q4 2016Q4 2017Q4 Current perceptions of inflation, ages 18–30 2018Q4 2019Q4 Current perceptions of inflation, ages 31–54 Current perceptions of inflation, ages 55+ Source: Bank of Canada Last observation: 2020Q2 Measurement issue 2: quality adjustment Moving to the second measurement issue, let’s talk about the principle of quality adjustment. To accurately measure price movements, the CPI should have goods and services in its basket that are of comparable quality over time. However, we know from our own experience that the quality of certain products—like electronics and cars—is constantly improving. Thus, measured price increases should be adjusted for quality changes. However, in practice, consumers see prices rising but they don’t consider that the quality has also improved. They see a larger price tag on things like cell phones, laptops and cars, but they don’t consider the new features that have been added. These types of goods represent about one-sixth of the CPI basket, as shown in Chart 6. -9Chart 6: About one-sixth of the CPI basket is subject to regular positive quality adjustments Gasoline 3% Gasoline‡ Electricity and others‡ Clothing and others 31% Electricity and others 28% Food, alcohol, beverages, tobacco products and others† Cell phones and others§ Cars and appliances§ Cars and appliances 11% Food, alcohol, beverages, tobacco products and others 22% Clothing and others* Cell phones and others 5% *Subject to positive or negative quality adjustments (others include furniture and rent) † Subject to adjustments mostly for changes in size, weight or unit (others include hygienic, medicinal and pharmaceutical products) ‡ No quality adjustments (others include water, fuel oil, public transportation, insurance, books, and many recreational services) § Subject to regular positive quality adjustments (others include audio and video equipment and telecom services) Sources: Statistics Canada and Bank of Canada Last observation: 2020Q2 For these goods, Statistics Canada applies quality adjustment techniques, including hedonic pricing,11 that take into account price changes resulting from new features and quality improvements.12 Such adjustments have removed about 0.2 percentage points from the CPI inflation rate, on average, in recent years. Measurement issue 3: the price of housing versus the price of houses The third and final measurement issue I’d like you to consider is that consumers’ perception of inflation is likely influenced by the price of houses.13 This is 11 For more details, see Statistics Canada, “The Canadian Consumer Price Index Reference Paper,” Catalogue no. 62-553-X (February 27, 2019). 12 Statistics Canada’s quality adjustments to the prices of various goods and services are estimates; thus, there is a risk that the overall impact of quality adjustment may be too small or too large. In the past, the prevailing view was that measures of inflation were biased upward because of a lack of quality adjustment, including for the introduction of new goods. Sabourin shows, however, that significant improvements have greatly reduced this bias in recent years, in P. Sabourin, “Measurement Bias in the Canadian Consumer Price Index: An Update,” Bank of Canada Review (summer 2012): 1–11. 13 There is a significant positive correlation between house price growth, as measured by the Teranet– National Bank House Price Index, and CSCE respondents’ inflation perceptions and expectations. - 10 particularly relevant in recent years, when we’ve seen rapid increases in house prices in markets like Toronto and Vancouver. This effect is understandable, since most Canadian households purchase a residence at some point in their lifetime. The crucial point is that the CPI inflation basket includes the price of housing—in other words, the price of the services that a house provides—not the price of a house. Statistics Canada estimates the price of housing services by adding up the costs associated with home ownership: namely, mortgage interest, insurance, property taxes, depreciation and maintenance and repairs.14 Over the last two decades, the price of houses has risen on average more than twice as fast as the price of housing, at a rate of 6 percent versus 2.5 percent (Chart 7). Chart 7: The price of houses has been growing much faster than the price of housing Year-over-year percentage change % -5 -10 2001Q1 2004Q1 2007Q1 2010Q1 Price of housing 2013Q1 2016Q1 2019Q1 Price of houses Note: The price of houses is measured using the Teranet–National Bank House Price Index, while the price of housing is based on CPI. Sources: Teranet–National Bank House Price Index, Statistics Canada and Bank of Canada Last observation: 2020Q2 The treatment of housing in inflation measurement is challenging, and it’s a topic of much debate.15 In recent years, Statistics Canada has been working diligently 14 Depreciation refers to the costs to maintain the structure and foundation of a house, while maintenance and repair costs are associated with the appearance of the house. The price of housing services can be estimated through either a user-cost approach, which is the one taken by Statistics Canada, or a rentalequivalence approach, with the latter seeking to capture the value of the services consumed. For further information on the different approaches to measuring the price of housing, see P. Sabourin and P. Duguay, “Measuring Durable Goods and Housing Prices in the CPI: An Empirical Assessment,” Bank of Canada Review (autumn 2015): 24–38. 15 Some jurisdictions exclude the price of housing entirely from their official measure of inflation. Some observers have gone to other extremes and have argued that the price of houses should be included in the CPI basket. The latter approach is difficult to justify theoretically, because houses are assets and serve as a store of wealth. It is the services that the house provides that are consumed. - 11 to improve the measurement of the price of housing services, and further enhancements are planned. Behavioural explanations While these three measurement issues offer plausible explanations of why consumers’ perceptions of inflation may be higher than measured rates, there are other explanations that are less tangible. The behaviour of consumers—which is determined by psychology as well as knowledge—has been found to have a significant impact on inflation perceptions and expectations. In terms of behaviour, our recent research shows that consumers’ perceived inflation rate tends to be influenced more by rising prices. The perception gap narrows when sharply declining prices are excluded (Chart 8).16 Chart 8: Inflation perceptions are strongly influenced by price increases % 2014Q4 2015Q4 Current perceptions of inflation Sources: Statistics Canada and Bank of Canada 2016Q4 2017Q4 2018Q4 CPI inflation when sharply declining prices are excluded 2019Q4 Actual CPI inflation Last observation: 2020Q2 The reason behind this is simple: in forming their perceptions of inflation, consumers seem to put more weight on prices that go up rather than down. The loss of purchasing power from rising prices has been found to have an outsized psychological impact.17 16 To illustrate this effect in Chart 8, we have modified one of our core inflation measures, CPI-trim, to exclude 20 percent of the weighted monthly price variations at the bottom tail of the distribution but to keep 20 percent at the top of the distribution of price changes. 17 For a review of this loss aversion effect, see L. Vogel, J.-O. Menz and U. Fritsche, “Prospect Theory and Inflation Perceptions—An Empirical Assessment,” DEP (Socioeconomics) Discussion Papers— Macroeconomics and Finance Series, No. 3/2009 (July 2009); H. Afrouzi and L. Veldkamp, “Biased Inflation Forecasts,” Society for Economic Dynamics 2019 Meeting Papers No. 894 (2019); and O. Coibion and - 12 Studies in other countries have found evidence of another behavioural explanation: namely, that consumers’ inflation perceptions are more strongly influenced by the prices of goods they purchase frequently—like food and gasoline.18 However, our recent research does not find a significant positive relationship between the price movements of frequently purchased goods and perceived inflation in Canada (Chart 9).19 Chart 9: Inflation perceptions not influenced by frequent purchases % 2014Q4 2015Q4 Current perceptions of inflation Sources: Statistics Canada and Bank of Canada 2016Q4 2017Q4 CPI, frequent purchases 2018Q4 2019Q4 CPI, non-frequent purchases Last observation: 2019Q4 Another factor that could affect the inflation perceptions gap of some consumers is their understanding of inflation and the economic factors that influence it. Improving their financial literacy could enhance their knowledge and serve to reduce the observed gaps. Central banks—including the Bank of Canada—are making a meaningful contribution to strengthening financial literacy through communication and outreach efforts.20 Y. Gorodnichenko, “Is the Phillips Curve Alive and Well After All? Inflation Expectations and the Missing Disinflation,” American Economic Journal: Macroeconomics 7, no. 1: 197–232. 18 For Canada, see A. Chaffe, “Consumer Price Inflation by Frequency of Purchase,” Statistics Canada Analytical Paper Catalogue No. 11-621-M no. 84 (2010); for the United States, see F. D’Acunto, U. Malmendier, J. Ospina and M. Weber, “Exposure to Daily Price Changes and Inflation Expectations,” National Bureau of Economic Research Working Paper No. 26237 (September 2019). 19 The price index of frequently purchased goods is constructed by using goods and services that consumers generally purchase on a monthly basis or more frequently (e.g., food, alcohol, tobacco products, utilities and personal care items). Note that the lack of significant correlation of the prices of frequently purchased goods and perceived inflation is found at the aggregate level. 20 At the federal level in Canada, the Financial Consumer Agency of Canada has primary responsibility for promoting financial education. Provincial governments have also taken steps in recent years to include financial literacy in their high school curricula, often in collaboration with the Canadian Foundation for Economic Education. - 13 So to recap, we’ve established that consumers’ inflation perceptions are generally higher than what is actually measured. We’ve looked at measurement issues that could explain this. And we’ve also considered some ways that consumers’ behaviour and understanding can shape the way they perceive inflation. The next logical questions would be: What is the role of a central bank in guiding consumers’ expectations towards our 2 percent inflation target? And why is this important? Inflation expectations and the conduct of monetary policy Let’s tackle the last question first. To do so, I think it’s relevant to look at the existing inflation-control agreement between the Bank and the Government of Canada. The agreement states that: “The well-established credibility of this framework has reinforced the Canadian public’s confidence that monetary policy will continue to achieve the inflation target, and helped underpin the Canadian economy through challenging times.” The key words here are “public’s confidence.” Because inflation expectations are a key determinant of economic behaviour and outcomes,21 it is important that consumers understand the Bank’s commitment to its inflation target. The more confidence that Canadians have in this commitment, the more they will anchor their beliefs and behaviours to this 2 percent target. Put another way, people will shrug off temporary movements in inflation if they believe inflation will remain on target in the long run. Their confidence that inflation will remain close to 2 percent helps keep inflation at that rate by allowing the economy to stabilize after short-term bumps. As a result of this confidence, the Bank has the flexibility to see through temporary movements in inflation. We can keep a “steady hand” on the conduct of monetary policy, with the goal of keeping inflation sustainably on target. However, in the context of a large and persistent shock, such as the start of the COVID-19 pandemic earlier this year, having a credible inflation target is even more important. With inflation expectations well anchored, the Bank was able to effectively respond in March to this unprecedented adverse shock. One of the actions we took was to reduce our policy interest rates by 150 basis points over three announcements. Because inflation expectations were well 21 Recent evidence indicates that public expectations of future inflation have become the primary driver of inflation—not economic slack, reflecting, in part, the success of inflation targeting. This has been found for a number of countries that practice inflation targeting and is known as “flattening” the Phillips curve. For example, for the United States, see O. Jordà, C. Marti, F. Nechio and E. Tallman, “Inflation: Stress-testing the Phillips Curve,” Federal Reserve Bank of San Francisco Economic Letter No. 2019-05 (February 2019); for Canada, refer to J. Kronick and F. Omran, “Inflation After the Crisis: What’s the Story?” CD Howe Institute Essential Policy Intelligence E-Brief (July 9, 2019). - 14 anchored at 2 percent, this translated into a decline in the real interest rate of roughly the same amount. This decline supported consumption and investment spending by households and firms, and helped promote demand through other channels, including the exchange rate. In contrast, if inflation expectations had not been well anchored, the reduction in our policy interest rate would have had less impact. Consequently, more monetary stimulus would have been necessary. Now, what about the role of communications in anchoring expectations? We’ve established that inflation expectations affect macroeconomic outcomes and the conduct of monetary policy. Policy success in achieving the target and informative and accessible communications can, in turn, also influence expectations. To be effective in influencing expectations, the Bank should: communicate often, communicate clearly and communicate consistently—all to a wide variety of audiences that include consumers, firms and market participants. The Bank has embedded this concept in our strategic planning. We are committed to knowing our audiences, their interests and how best to reach them. Indeed, our research finds that when we provide households with practical information about our inflation target, they tend to shift their views toward actual inflation.22 In addition, we use other communication channels, including engaging in public outreach, offering accessible explanatory articles on our website, 23 and conducting education programs for students at all levels. All these initiatives help us connect with the public to explain the work we do and to underscore why it is important to them and to their families. We will also continue to consult on our inflation-target renewal process. To this end, we just launched an online public consultation called “Let’s Talk Inflation.” We are inviting Canadians to tell us what they think about inflation, our inflationtargeting framework and potential alternative monetary policy frameworks. Conclusion Let me conclude. Low and stable inflation is the core objective of our monetary policy. Achieving our inflation target depends critically on the credibility of the target and the anchoring of the public’s perceptions and expectations of inflation. Acknowledging and better understanding any gap between perceived and measured inflation is, therefore, very important. Public confidence in the target depends on measuring inflation accurately. Our research with Statistics Canada 22 For example, forward-looking information, such as the inflation projection in the Monetary Policy Report, has been found to have a strong impact. For more details, see the forthcoming Bank of Canada staff working paper by O. Kostyshyna and L. Petersen, “Communicating Central Bank Statistics and Uncertainty: A Randomized Information Experiment.” 23 www.bankofcanada.ca/publications/the-economy-plain-and-simple - 15 as part of our 2021 inflation-target renewal process underscores our interest in this goal. Moreover, our communications strategy must strive to explain inflation, our target and our policy to different audiences in a clear and accessible manner to deepen their understanding. Our ongoing efforts to reach out and listen to diverse groups of Canadians are helping to strengthen our communications. While we have benefited from having well-anchored inflation expectations in the past, this mooring will be tested by the very rough economic waters caused by the pandemic. Our extraordinary policy actions have been firmly focused on attaining our inflation target, by supporting demand and employment throughout this difficult and protracted economic recovery. Through our words—and more importantly, through our actions—we remain steadfast in our commitment to helping restore the Canadian economy and the economic and financial welfare of all Canadians.
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Opening remarks (delivered virtually) by Ms Carolyn A Wilkins, Senior Deputy Governor of the Bank of Canada, at the Bank of Canada Workshop "Toward the 2021 Renewal of the Monetary Policy Framework", Ottawa, Ontario, 26 August 2020.
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Carolyn Wilkins: Opening remarks - “Toward the 2021 Renewal of the Monetary Policy Framework” Opening remarks (delivered virtually) by Ms Carolyn A Wilkins, Senior Deputy Governor of the Bank of Canada, at the Bank of Canada Workshop “Toward the 2021 Renewal of the Monetary Policy Framework”, Ottawa, Ontario, 26 August 2020. * * * Bonjour tout le monde, et bienvenue à notre colloque virtuel. Thank you all for joining our workshop on the renewal of the Bank of Canada’s monetary policy framework in 2021. Renewal is just around the corner—hard to believe. Bank researchers have made a lot of progress since we kicked off our workplan in 2018. That seems like a thousand years ago given the current health and economic context. At that time, in a speech at McGill’s Max Bell School of Public Policy, I laid out the main challenges confronting us as we did our work. We are looking forward to the conference they will host on this topic in September. One challenge I laid out in that speech has become crystal clear today: central banks are likely to run out of conventional firepower if we see an economic downturn in a low-interest-rate world. Another challenge is that long periods of low interest rates encourage investors to take on risk that may be excessive. We see that now with high levels of indebtedness, not only in Canada, but around the world. Global debt-to-GDP is nearly 350 percent—much higher than at the time of the global financial crisis. These challenges led us to focus our research on three questions: First: Can we articulate another framework that will do a better job than the inflation-targeting framework that’s been in place for over 25 years? To answer this, we are running a horse race among alternative frameworks for monetary policy. These include average inflation targeting, price-level targeting, an employment-inflation dual mandate and nominal GDP growth and level targeting. Another possibility is to raise the inflation target. We are evaluating these frameworks against a clear set of criteria. Of course, we are looking to see how well they can achieve stability in the economy and in prices so that businesses and families can make decisions with more confidence. We’re considering the implications for accountability, communications and credibility. We’re also looking at more novel criteria: how each framework impacts the distribution of income and wealth, and how robust the frameworks are in good economic times and bad. You’ll hear more about the results of the horse race later. Second: How can the Bank of Canada’s tool kit support whatever monetary policy framework we end up choosing? To answer this question, we are studying how the tools the Bank recently introduced have impacted both financial markets and the real economy. I can say that in 2018, I would not have foreseen that we would have deployed so many of our tools in response to a global pandemic. I am grateful, however, that the advance legwork staff did meant we were ready to respond quickly. Finally: How can other public policies work together with monetary policy to support sustainable growth and price stability? Like other central banks, we are closely following research that examines how monetary policy interacts with fiscal and other public policies. You have undoubtedly noticed that we have a live experiment in motion on how monetary and fiscal policy can complement one another during a crisis. The purpose of today’s workshop is to discuss what we have learned so far from the considerable research produced by our staff and to gather your views on these research questions. Our discussion with you is just one of several ways we’re seeking feedback: earlier 1/3 BIS central bankers' speeches this week we launched an online public consultation to gather Canadians’ views on the Bank’s approach to monetary policy. This input from the public, along with consultations held with diverse groups representing consumers, labour, businesses, Indigenous communities, civil society and academics, will inform the Bank’s thinking on the best monetary policy framework for Canada. The plan is to publish a report in the coming months summarizing what we’ve heard. Today, we want to hear your comments and advice so we can make sure the evidence we bring to bear on the final decisions is robust and thorough. Before we begin the day, I’d like to reflect on early impressions of how well our current monetary policy framework has served us during the pandemic. First, the fact that we have a clear and simple framework is golden. We have a clear target—2 percent inflation—which means businesses and families know what we aim to achieve with our actions. We know that central banks must be transparent, especially in times of crisis. Our inflation target of 2 percent is defined in terms of the annual consumer price index (CPI) inflation rate, so it’s simple to see if we’ve done our job well or not. Second, our framework is flexible in terms of how fast we aim to return inflation to target. This flexibility means that we can also consider how well the job market is doing when we are determining how quickly to achieve our inflation target. It’s also useful in circumstances where returning inflation to target more slowly could help support financial stability. Third, I’m struck by how far we’ve come in our understanding of the limits of monetary policy to solving all problems. This has increased the focus on how fiscal policy should contribute to stimulating growth and on how structural policies increase long-term economic prosperity for Canada. It has also underlined the role of macroprudential policies in helping to avoid the buildup of financial vulnerabilities when interest rates are low. Such policies include mortgage stress tests and other regulations to support sound underwriting practices. Let me be clear, monetary policy is ill-equipped to deal with sector-specific issues. We need to take them into account in our monetary policy decisions, but our focus must be on the macro economy to support sustainable growth and price stability. In the current context, coming out of such a severe hit to jobs and economic activity, the Bank must keep its eye on the ball. Fortunately, there are many other policies that are well suited to deal with sector-specific issues. All of this together highlights the challenges of policy coordination and the importance of central bank independence. The Bank of Canada, along with other central banks, is deploying an array of monetary policy tools to support the economy and financial system in response to the pandemic. The Bank has been clear that our efforts, including quantitative easing, are in support of our monetary policy objective—and ultimately the economic and financial well-being of Canadians. That said, there is one other area where I think we need to dig in more. That is the measurement of our target—the CPI. Last year during our consultations, we heard loud and clear that the measure of inflation needed to be considered. Many people feel that inflation is higher than reported. That’s why we started working with Statistics Canada last year to look for ways to improve the CPI. Deputy Governor Schembri spoke about this yesterday at the Canadian Association for Business Economics. This work continues now at an accelerated pace, because COVID-19 has only exacerbated this perception of higher inflation. Prices that are falling, like those around travel, are not relevant to most people; but the prices that are rising, like the cost of food, are those we encounter every week. The price of meat has risen by more than 4 percent since February—before the pandemic hit Canada. That doesn’t feel like low inflation to me or to many families, yet measured inflation is 2/3 BIS central bankers' speeches close to zero when you consider the full basket of goods and services. It’s critical that we measure inflation as accurately as possible so Canadians have confidence in our target; and we must address public perceptions in our analysis and communications. In the morning session, we will compare monetary policy frameworks and provide an update on the horse race. It’s a big topic, so we’ve split the session into two parts. First, Rhys Mendes will provide an overview of how our side-by-side assessment has progressed. So far, we’ve identified some of the strengths and weaknesses of the different frameworks. But at this point, no single framework dominates on all margins. After a break, we welcome a discussion of the horse race. Joseph Gagnon from the Peterson Institute for International Economics, Pierre Fortin from the Université du Québec à Montréal and Stephanie Schmitt-Grohé from Columbia University will lead. At lunch, we’ll watch a video in which Deputy Governor Schembri explores the recent Bank of Canada staff discussion paper, “Strengthening Inflation Targeting: Review and Renewal Processes in Canada and Other Advanced Jurisdictions.” Then we’ll break into small groups to discuss the results of the horse race. In the afternoon, Session 2 will examine policy coordination in a time of crisis. Césaire Meh will chair this one, with discussions by Ricardo Reis of the London School of Economics, and Marty Eichenbaum of Northwestern University. Finally, we’ll close with a discussion of those alternative tools I mentioned and lessons from the COVID-19 crisis. Leading the discussion will be Ed Devlin, formerly of PIMCO, Annette VissingJørgensen from the Haas School of Business at Berkeley and Anil Kashyap from the University of Chicago Booth School of Business. Seeing unconventional monetary policy tools in action during COVID-19 has put renewed focus on how they’re impacting both asset prices and decisions on borrowing and lending. We should, of course, also discuss the side effects we are most concerned about and explore ways we can mitigate these without reducing the effectiveness of the tools. We are looking forward to your feedback today—it will inform and influence our next steps. I will return to this virtual stage at the end of the day to sum up the takeaways from our work here. Let’s start the conversation. I’m expecting a lively and constructive discussion. 3/3 BIS central bankers' speeches
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Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, at the Federal Reserve Bank of Kansas City Jackson Hole Symposium, Jackson Hole, Wyoming, 27 August 2020.
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Tiff Macklem: The imperative for public engagement Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, at the Federal Reserve Bank of Kansas City Jackson Hole Symposium, Jackson Hole, Wyoming, 27 August 2020. * * * Introduction I last spoke at Jackson Hole in 2005. Then, the world had been dealing with a frightening coronavirus called SARS. And my topic was the sea change in central bank communications and transparency in the Greenspan era. Today, we are discussing the policy response to a more widespread and contagious coronavirus, and my topic is the need for a second sea change in central bank communications —from transparency with markets to more engagement with the public. We’ve started, but we need to accelerate. In a nutshell, we need to spend more effort speaking and listening to the citizens we serve. Diversifying our engagement improves our capacity to make better policy decisions and enhances our legitimacy as public institutions. That is more important now than ever as we grapple with COVID 19 and its harsh economic consequences, which affect everyone. And it will be critical in the future as we tackle the impact of structural changes to our economies arising from the legacy of COVID 19 and those it is amplifying, including digitalization, debt and inequality. While the SARS pandemic didn’t have lasting economic impacts in 2005, the 2008 US sub-prime mortgage crisis certainly did. Our economies eventually recovered, but societal scars remain. When too-big-to-fail global banks were bailed out in the crisis—and struggling homeowners weren’t—it stoked the belief that the system is rigged and that globalization benefits a few at the expense of many. This contributed to the broader decline of trust in public institutions and experts and a rise in political populism—trends that affect our jobs as central bankers.1 The last 15 years have also seen a profound change in how information is shared, consumed and debated. The internet slashed the cost of communication. This disrupted traditional media and led a growing segment of the public to get their news from alternative channels and social media. Many had hoped that the democratization of information would make us all better informed. Sadly, too often that’s not the case. While the internet and social media have vastly broadened access to information, they are also awash with misinformation, echo chambers and conspiracy theories—often pushed by bots and trolls, sometimes for nefarious purposes. Against this backdrop came the pandemic and its devastating global economic impact. Central banks have taken unprecedented monetary policy actions to save livelihoods, support economic recovery and avoid deflation. For the Bank of Canada, this has meant our first foray into quantitative easing. Central banks are conducting unconventional monetary policies alongside extraordinary fiscal stimulus, which is challenging public perceptions of our operational independence. So, it is more important—yet harder—for central banks to be trusted sources of information and analysis. The imperative is to step boldly beyond market transparency and engage with the public to explain how our actions serve our economy-wide objectives. This means listening to more people, understanding their perceptions—accurate or not—factoring broader public views into our policy decisions and communicating with people on their terms, not ours. 1/3 BIS central bankers' speeches Let’s remind ourselves why this matters. First and fundamentally, we are all public servants. The public has a right to understand what we are doing, and we need to be accountable for our actions. Second, we know that monetary policy works better when people understand it. Third, many central banks are at the lower bound for their policy interest rate. In this situation, it is more essential than ever that household inflation expectations remain anchored on our target, so we can lower real interest rates. We can influence those expectations with our communications. That is why many central banks, including the Bank of Canada, are providing unusual forward guidance on our policy rate paths. And there’s a final, existential reason: without public understanding and support for independent central banks, we risk losing the public trust that is so core to our mission. Issues in public communications Back in Greenspan’s time, central banks didn’t put much effort into tailoring messages to the public. Instead, we relied on the media to speak to market participants and economists and then interpret our messages for the public. Andy Haldane has described this as the practice of central bankers speaking only to MEN: markets, economists, news agencies.2 This practice hasn’t been entirely effective. A recent NBER working paper shows that news articles about monetary policy are only about half as persuasive in terms of molding inflation expectations compared with communications that come straight from the central bank.3 The best way to get our messages to the public is to deliver them ourselves. Central banks have been moving toward more direct public engagement. We can all learn from the Fed Listens program as well as the Bank of England’s Citizens’ panels and Community forums. Around the world, central banks are using museums, social media, podcasts, even reggae songs, to tell their stories to their citizens. The Bank of Canada, like others, has taken steps to sharpen its public communications. We publish layers of content aimed at different audiences. We produce short animations to illustrate the main points of our flagship publications—the Monetary Policy Report and the Financial System Review—and we promote these across social media channels. We use readability tools to ensure that public speeches are not unnecessarily complex. After all, even an audience as expert as this one is more likely to lose attention if I’m reading what sounds like a PhD dissertation. (Hopefully that’s not what I sound like.) Further, we are working hard to make our communications more relatable to people’s everyday lives. Let’s use this pandemic as an example. COVID 19 has caused a huge disinflationary shock. But we need to recognize that many people don’t feel like inflation is falling when food inflation has been averaging almost 3 percent. People should know that we are taking that into account when we make policy. Deputy Governor Larry Schembri devoted an entire speech to this topic earlier this week. A key to enhancing our relatability is listening—engaging the public in conversations. The pandemic has precluded many traditional events where these conversations can happen. So, we are being nimble with technology to engage stakeholders, including the public. We just launched a “Let’s Talk Inflation” online campaign as part of our effort to reach out to all Canadians before the Bank renews its agreement with the Canadian government on the monetary policy framework in 2021. We know that there is a clear correlation between increased understanding and higher levels of trust. This correlation demands that we devote more effort to economic and financial literacy. To that end, the Bank of Canada replaced one of its expert publications with a more accessible digital magazine, The Economy, Plain and Simple, to explain relevant and timely economic 2/3 BIS central bankers' speeches issues to non-expert audiences. We have added a series of simple articles, videos and animations to explain the ways we’ve responded to the pandemic, covering everything from quantitative easing to payment systems. An opportunity to build trust In times of crisis, people look to public authorities for information. This pandemic is no exception. We have seen a sharp increase of internet traffic to our website. Our articles in The Economy, Plain and Simple and our social media posts are getting twice as many page views than before the pandemic, while traditional content, such as speeches and our Monetary Policy Report, has seen traffic increase by more than 10 percent. This heightened interest is an opportunity, and it is critical that we do not squander it. The forces that are pushing misinformation on the public are preying on this crisis. A segment of the population still mistrusts public authorities and experts. The independence that is vital for central banks and public perceptions of that independence are under threat in many countries. As we work to broaden our engagement, we can be guided by four principles for communicating effectively with the public. The first principle is to tell a story that is coherent and consistent with incoming data and over time. Second, public communications should be clear, in plain language and free of jargon. People should be able to understand what we say—always. The third principle is to make public communications relatable and relevant. We should speak to people as public servants and peers, not as oracles delivering messages from an ivory tower. The fourth is to listen. We need to find out and understand what is preoccupying the public, including the perspectives of communities and groups we have not been very good at reaching. And we need to address those preoccupations. Conclusion Let me conclude. We have each been asked to suggest legacies of the pandemic. These legacies are numerous and far-reaching—the toll of the lives and livelihoods lost, the foregone economic output, social upheaval, changing trade patterns and lasting debt burdens. As we confront these and other legacies, let’s make this another legacy—a deeper relationship between the central bank and its citizens. We can capitalize on this moment by enhancing our public communications through coherent, clear and relatable messages; by helping our citizens understand the broader forces at work in our economy; and by listening and understanding how our policies affect everyone. These efforts will help us to make better policy decisions, reinforce our legitimacy and cement trust with our citizens. The stakes are high, and this opportunity should not be missed. 1 While Canada has been insulated from these trends when compared with the United States and much of Europe, we have not been immune. At the start of 2020, less than half of Canadians said they trusted government institutions, according to the Edelman Trust Barometer. 2 See www.youtube.com/watch?v=yBv_HVVN-6Q 3 O. Coibion, Y. Gorodnichenko and M. Weber, “Monetary Policy Communications and their Effects on Household Inflation Expectations,” National Bureau of Economic Research Working Paper No. 25482 (September 2019). 3/3 BIS central bankers' speeches
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Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, to the Canadian Chamber of Commerce, Ottawa, Ontario, 10 September 2020.
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Remarks by Tiff Macklem Governor of the Bank of Canada The Canadian Chamber of Commerce Ottawa, Ontario September 10, 2020 (via webcast) Economic progress report: a very uneven recovery Introduction Thank you for the kind introduction. I am pleased to connect with you virtually to discuss our interest rate decision yesterday and some of the challenges facing Canada during the current economic recovery. Tomorrow marks six months since COVID-19 was declared a global pandemic. Since then, this disease has taken a huge toll on lives and livelihoods. In the first half of 2020, it caused the biggest global downturn since the Great Depression. In Canada, the economy saw the sharpest drop on record in the second quarter. Gross domestic product fell about 13 percent in the first half of the year. At the low point in April, about 3 million Canadians were out of work, and millions more were working reduced hours. This recession has been exceptionally severe. It is also unusual in how unevenly it is affecting businesses and people. Business closures and job losses have been less severe in sectors that could quickly adapt to remote work and online transactions. In contrast, sectors that require close contact—and the people who work in them—have been hit hardest. These are mostly service industries, whose workers—often women, youth and low-wage earners—have borne the brunt of the impact. As Canada’s central bank, we set monetary policy to help create the conditions for broad-based growth and opportunity. Our mandate is to maximize the economic well-being of Canadians. Very uneven recessions tend to be longer and have a larger impact on the labour market. So, uneven outcomes for some can lead to poorer outcomes for all. Thus, even if monetary policy cannot target specific sectors, it is important for us to understand the uneven impacts of this recession and to make policy decisions that support lasting, broad-based growth. I would like to thank Karyne Charbonneau, Erik Ens and Corinne Luu for their help in preparing this speech. Not for publication before September 10, 2020 12:30 Eastern Time -2Today I’m going to talk about: ▪ the uneven impact that COVID-19 is having on different sectors and people; ▪ the role policy plays in boosting growth with benefits that can be widely shared; and ▪ Governing Council’s decision yesterday to keep our policy interest rate unchanged and maintain our quantitative easing program. Afterwards, I’d be happy to take your questions and exchange views. A very uneven contraction and reopening In our July Monetary Policy Report, we saw the recession and recovery playing out in three phases: containment, reopening and recuperation. We expected that the strong growth of the reopening would give way to a slower and bumpier recuperation. As a result, the economy would take a long time to get back to where it was at the end of 2019, before the pandemic. Data released since July suggest the bounce-back has been a little stronger than we had anticipated. By August, almost 2 million jobs had been recouped—that’s roughly two-thirds of job losses through March and April. This is very encouraging. But the pandemic put us in a very deep hole, and we still have a long climb ahead. For some sectors, the hole was deeper, and the climb back will take longer. Fields where remote work is possible have generally not experienced widespread job losses. And essential workers—hospital staff, first responders and grocery store employees—had to keep working despite the pandemic. We are very grateful to them. But workers in several service industries—such as restaurants, retail and travel—saw devastating job losses during the containment phase (Chart 1), and these sectors are recovering only slowly. Many of the businesses in these industries have closed.1 And many of those that have reopened are operating well below capacity. The latest data from Statistics Canada show that air transportation in June was still down 94 percent from February, and the food service industry was operating at 40 percent below prepandemic levels. 1 Statistics Canada, “Study: Monthly business openings and closures: Experimental series for Canada, the provinces and territories, and census metropolitan areas, 2015 to 2020,” The Daily (August 5, 2020). Chart 1: Job losses were more severe in sectors with close contact and less remote work, affecting women in particular* % of workers who worked from home, week of April 12, 2020 April 2020, monthly data Educational services Professional, scientific & technical services Information, culture & recreation Finance, insurance & real estate Resources† Public administration Utilities Health care & social assistance Other services Agriculture Transportation & warehousing Manufacturing Business & support services Construction Trade Accommodation & food services % of workers in a job involving close physical contact in 2019 * The size of the bubble represents the percent change in employment between February and April 2020. Sectors in green represent those where women's share in employment as of 2019 is above their average share for all industries (47.6%). † "Resources" includes forestry, fishing, mining, and oil and gas. Sources: Statistics Canada and Bank of Canada calculations This unevenness across sectors is disproportionately affecting lower-income jobs (Chart 2). Remote work tends to be possible in higher-paying occupations. Jobs in the service industries most affected tend to be lower-paying, part-time and with fewer benefits. Chart 2: The declines in employment were greatest for low-wage workers Change in employment from February to April 2020 by weekly earnings, not seasonally adjusted, monthly data % -5 -10 -15 -20 -25 -30 -35 -40 -45 Less than $500 $500 to $799 Change in employment by weekly earnings Sources: Statistics Canada and Bank of Canada calculations $800 to $1,199 $1,200 or more Change in employment for all earnings -4These jobs tend to be held by women and youth. Women make up 47 percent of the labour force but about 56 percent of the accommodation and food sector. Young people aged 15 to 24 make up about 40 percent of that sector—more than three times their share of the labour force. Before the pandemic, the labour participation rate for women was closing a longstanding gap with men. That trend has reversed. The female participation rate fell during the containment period and is not recovering as quickly as the male participation rate in most age groups (Chart 3). Chart 3: More women than men have dropped out of the labour force Change in participation rates by age and gender between February and August 2020, seasonally adjusted, monthly data percentage points 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 All ages (15+) 15–24 25–54 Men 55+ Women Sources: Statistics Canada and Bank of Canada calculations The closing of schools and daycares kept many parents at home, especially women, who tend to take on more of the responsibility for child care (Chart 4). How quickly this can be turned around depends on how the reopening of schools plays out and whether at-home learning arrangements allow parents to work. -5Chart 4: Among parents, mothers have seen a greater decline in hours worked and a slower recovery than fathers Change in total hours worked relative to February 2020 by age of youngest child, monthly data* % % -5 -5 -10 -10 -15 -15 -20 -20 -25 -25 -30 -30 Under 6, men Under 6, women 6–12, men 6–12, women 13–17, men 13–17, women Current level vs. February, men Change at trough, men (February to April) Current level vs. February, women Change at trough, women (February to April) *To account for seasonal fluctuations, staff compare the change in 2020 employment with changes in 2019 to isolate the additional changes in hours worked related to the COVID-19 shock. Change at trough is calculated as (2020M04/2020M2-1)*100-(2019M04/2019M02-1)*100 and current level change is (2020M08/2020M02-1)*100-(2019M08/2019M02-1)*100. Sources: Statistics Canada and Bank of Canada calculations Last observation: August 2020 Job losses and reduced hours have been especially severe for young people. At one point, more than half of the potential youth labour force was underutilized.2 Among younger workers, women have been affected much more than men. Finally, although the data is not as complete for visible minorities and Indigenous Peoples, available data suggests that these groups have fared worse during the pandemic than other Canadians.3 For example, Statistics Canada reported that in August the unemployment rate for younger members of visible minorities is almost 15 percentage points higher than that for other Canadian youth. Moreover, as of August, employment for Indigenous Peoples living off reserves was still almost 9 percent below its February level, compared to just over 3 percent for non-Indigenous Canadians. Incomes have been much less affected than employment, thanks to government programs like the Canada Emergency Response Benefit (CERB). And government wage-support programs are helping workers stay connected to their employers—many of the job losses from COVID-19 are temporary layoffs. 2 Statistics Canada created a specific definition of labour underutilization to track the impact of COVID-19 on the labour market. The labour underutilization rate as measured by Statistics Canada combines the following segments of the population into a share of the potential labour force: unemployed workers, people who are not in the labour force but who wanted a job yet didn’t look for one, and employed workers who lost all or most of their usual hours worked for reasons likely related to COVID-19. 3 In this paragraph, “other Canadians” refers to Canadians who were not a member of a population group designated as a visible minority and who did not identify as Indigenous. -6Chart 5: Permanent layoffs drove more of the increase in non-employment for youth and women Change in non-employment as a percent of the population, April vs. February 2020, not seasonally adjusted, monthly data % 19.0% 36% 9.4% 9.8% 47% 40% 8.0% 52% 68% 57% 46% 49% -5 Male Female Permanent layoff 15–24 Temporary layoff Other 25+ Total Note: Non-employment includes both unemployed people and people who are not in the labour force for any reason. Sources: Statistics Canada and Bank of Canada calculations Still, young people and women are more likely to have been laid off permanently (Chart 5). On average, people who are permanently laid off take twice as long to return to work as people on temporary layoff. This risks long-term damage to their prospects. High unemployment for young people, for example, has been shown to have a lasting drag on their incomes.4 We’ve known for years that good policy frameworks can help set up a virtuous circle of sustainable growth with declining inequality. 5 Over the past 40 years, Canada has done a better job than many advanced economies in promoting growth that is shared (Chart 6). While Canada and the United States have seen almost identical average growth since around 1980, our growth has been achieved with less income inequality. Income inequality rose in many countries in the 1980s and 1990s, including in Canada. But in our case, it peaked in about 2006 and has been trending down to stable since (Chart 7).6 4 A Statistics Canada study found that if youth unemployment stayed at its June rate of almost 28 percent for the rest of 2020, this year’s high school and post-secondary graduates could lose an average of $25,000 in income over the next five years compared with previous graduates. 5 For example, see T. Macklem, “Promoting Growth, Mitigating Cycles and Inequality: The Role of Price and Financial Stability” (speech to the Brazil–Canada Chamber of Commerce, São Paulo, Brazil, March 12, 2012). 6 A. Bowlus, É. Gouin-Bonenfant, H. Liu, L. Lochner and Y. Park, “Four Decades of Canadian Earnings Dynamics Across Workers and Firms,” Bank of Canada Staff Working Paper (forthcoming 2020). -7Chart 6: Income inequality in Canada is slightly below OECD average and lower than in the United States Gini coefficient on disposable income (after taxes and transfers), latest year available 0.50 0.45 → Higher inequality 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 Slovak Republic Slovenia Czech Republic Iceland Denmark Norway Belguim Finland Austria Poland Sweden Netherlands Germany Hungary France Ireland Switzerland Estonia Canada OECD Greece Portugal Australia Luxembourg Spain Italy Japan Isreal Korea Latvia United Kingdom Lithuania United States Turkey Mexico Chile 0.00 Sources: Organisation for Economic Co-operation and Development (OECD) and Bank of Canada calculations Chart 7: Income share of top earners peaked in 2006 before trending down Annual data % Top 1% Sources: Statistics Canada and Bank of Canada calculations Last observation: 2016 Before the pandemic, years of strong labour-market growth brought Canada’s unemployment rate to the lowest in four decades. People who had given up looking for work found jobs and returned to the labour force. Unfortunately, the pandemic has undone these employment gains and more. -8Moreover, COVID-19 may accelerate some of the global forces that could make growth less inclusive. The use of digital technology has accelerated as COVID-19 drives households and businesses to do more online. Like earlier waves of innovation, digitalization can be expected to lead to broad economic gains and higher living standards over time. But there are risks, particularly in the transition. In the early days, lower- and middle-income workers are likely to bear much of the initial cost of displacement (although even higher-paying jobs are increasingly not immune). There are other ways that the pandemic could narrow opportunity. The commodities boom in the mid-2000s was good for both growth and economic opportunity in Canada. Higher prices for oil and other resources helped raise wages for workers in those sectors and reduced poverty rates in energyproducing regions. Long-distance commuting to the oil patch also helped increase wages elsewhere in Canada. The resource sector continues to be an important source of employment in many regions. Lower global demand for oil, though, means investment and hiring in that industry are likely to remain weak, and some projects may never come back on stream. Inequality, growth and monetary policy Because we were faced with an exceptionally severe and unusually uneven recession, the fiscal and monetary policy responses to the pandemic have been unprecedented. Fiscal policy has taken the leading role, with the government scaling up existing programs and introducing entirely new ones to bridge Canadians through this sharp downturn. Measures like CERB and wage-support programs have replaced lost incomes, providing a cushion for many families, especially lowincome households. To help during the reopening of the economy, the government has extended its wage subsidy program and is changing CERB into an expanded employment insurance program. These programs are keeping workers connected to employers and the unemployed connected to the labour force, supporting the recovery. The Bank of Canada also responded to the economic crisis with speed and determination. We lowered the policy rate to the effective lower bound of 25 basis points and launched a series of liquidity and purchase programs, first to keep credit flowing and then to provide monetary stimulus as the economy reopened. With the economy now moving through reopening to recuperation, the Bank is doing everything it can to support growth and get people back to work. The best way to durably improve economic outcomes and avoid the scarring effects of extended job losses is to get people working again. By making credit more affordable, our policies help pave the way for consumers to spend and for businesses to invest and expand. By anchoring our actions around our inflation target, we will be supporting the economy through the full length of the recovery, helping to bring it back to full capacity with full employment. That is the best contribution we can make to broader opportunity. Striving for equality of opportunity is simply the right thing to do. It’s also good for growth. The loss of jobs for women, youth and low-wage workers is a problem for -9us all. If these workers become discouraged and leave the labour force or lose valuable skills over time, their reduced economic participation will lower our potential growth, limiting living standards for everyone. More generally, as highlighted in recent years by the G20, inequality can make economies less resilient.7 The Bank of Canada’s policy framework is up for renewal next year, and we were already in the middle of a comprehensive review before COVID-19 came along. As Senior Deputy Governor Carolyn Wilkins said recently, we are exploring different frameworks to compare how effectively they support price stability, the economy and jobs, including the distribution of income and wealth.8 We are asking Canadians to take part in an online survey called Let’s Talk Inflation to tell us how changes in the economy are affecting them and their communities. This will inform our review and help us understand how monetary policy affects people and their economic decisions. Our experience responding to the pandemic gives us plenty to think about.9 As part of our review, we are also studying the effects of tools such as largescale purchases of assets, like government bonds. Along with many other central banks, we have been using this tool since March to stimulate the economy through a process known as quantitative easing (QE). The use of these tools by central banks around the world is still relatively new, and we are assessing their effectiveness. The experience of the 2008–09 global financial crisis in other countries led some to argue that QE contributed to inequality by boosting prices for financial assets held by wealthier people.10 It is true that QE works through many channels, including financial portfolios, that may boost wealth inequality.11 But as research on the experience with QE in the United States and euro area highlights, QE can also reduce income inequality.12 That’s because lower borrowing costs stimulate economic activity, which in turn boosts jobs and 7 See, for example, this G20 leaders’ communiqué from the 2014 summit in Brisbane, Australia, and this communiqué from the 2015 summit in Antalya, Turkey. 8 C. A. Wilkins, “Opening remarks” (remarks [delivered virtually] to Bank of Canada Workshop: Toward the 2021 Renewal of the Monetary Policy Framework, Ottawa, Ontario, August 26, 2020). 9 Other central banks are doing similar reviews of their monetary policy frameworks, and we are all learning from each other. See, for example, J. H. Powell, “New Economic Challenges and the Fed’s Monetary Policy Review” (speech to the economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 27, 2020). 10 See A. Saiki and J. Frost, “Does unconventional monetary policy affect inequality? Evidence from Japan,” Applied Economics 46, no. 36 (2014): 4445–4454; as well as H. Mumtaz and A. Theophilopoulou, “The impact of monetary policy on inequality in the UK. An empirical analysis,” European Economic Review 98 (2017): 410–423. 11 See Bank of Canada, “Monetary policy tools,” Monetary Policy Report (July 2020): 27–28 for a discussion of policy tools and the channels through which QE provides stimulus to the economy. 12 See, for example, J. Bivens, “Gauging the Impact of the Fed on Inequality During the Great Recession,” Hutchins Center Working Paper No. 12 (2015); C. Guerello, “Conventional and Unconventional Monetary Policy vs. Households Income Distribution: An Empirical Analysis for the Euro Area,” Journal of International Money and Finance 85 (2018): 187–214; and M. Lenza and J. Slačálek, “How Does Monetary Policy Affect Income and Wealth Inequality? Evidence from Quantitative Easing in the Euro Area,” European Central Bank Working Paper No. 2190 (2018). - 10 incomes, particularly for people with lower incomes. Research on this topic is ongoing both internationally and here in Canada. We will continue to study and monitor all the effects of QE. In summary, we know that monetary policy is a broad macroeconomic instrument that cannot target specific sectors or workers. But growth and how it is shared are not independent. The stronger and more durable the recovery, the more opportunity there is for everyone. And the more opportunity there is for everyone, the stronger the recovery, and the more durable is growth. Our decision yesterday Let me conclude with a few words about yesterday’s policy announcement. In our deliberations, the Governing Council naturally spent a lot of time reviewing the latest economic data. We saw that the Canadian and global economies are evolving largely in line with the scenario we laid out in July. After shrinking by just over 13 percent in the first half of the year, the Canadian economy has bounced back even more strongly in the reopening phase than we were expecting. Employment has rebounded, although as I have reviewed in some detail, this rebound has been uneven. The economy is benefiting from considerable fiscal support to protect the most vulnerable, replace lost income and subsidize wages. The Bank of Canada has complemented this effort by keeping credit flowing and reducing borrowing costs. The cuts in our policy rate combined with our QE program have contributed to reducing the interest rates faced by households and businesses since the pandemic began. With credit markets functioning well, demand for our short-term liquidity facilities has declined, and the uptake on our provincial and corporate bond-buying programs has been modest. The provincial and corporate bond programs will continue as announced. The Bank stands ready to adjust our short-term liquidity facilities as market conditions warrant. Well-functioning credit markets and considerable monetary policy stimulus have supported growth through the reopening phase. In fact, we’ve seen more household spending—particularly on goods and housing—than we were expecting, largely reflecting the release of pent-up demand. Exports are also recovering as foreign demand picks up, although they remain below prepandemic levels. Despite this good news, the members of Governing Council still expect the recuperation phase to be slow and choppy. We don’t expect the strong rebound we’ve seen to continue at the same pace in the months ahead. Business confidence and investment remain subdued. More fundamentally, uncertainty about the future course of the pandemic will continue to restrain the economy, particularly in sectors that involve close contact. And the pandemic itself is accelerating several structural challenges, some of which I mentioned earlier, to which the economy will need to adjust. The Governing Council also discussed inflation and its outlook. With CPI inflation close to zero, and downward pressure coming from energy prices, travel services and economic slack more generally, we expect inflation to stay well below the - 11 2 percent target in the near term. Our core measures of inflation have drifted slightly lower, consistent with the unused capacity in the economy. So, we agreed that as the economy shifts from reopening to recuperation, it will continue to need extraordinary monetary policy support. This is how we can help bring the economy back to its capacity and help get people working again. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the inflation target is sustainably achieved. To reinforce this commitment and keep interest rates low across the yield curve, the Bank is continuing its large-scale asset purchase program at the current pace. This QE program will continue until the recovery is well underway and will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective. Thank you.
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Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, at The Global Risk Institute, 8 October 2020.
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Tiff Macklem: From COVID to climate — the importance of risk management Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, at The Global Risk Institute, 8 October 2020. * * * Introduction Thank you for including me in this birthday party—the Global Risk Institute (GRI) is 10 years old. I’m proud to say I played a small part in its birth and chaired its board of directors for four years. So, while I may be less than objective, I’m very pleased to be here to celebrate GRI and the important role it plays in supporting sound risk management in our financial services industry. Before highlighting several financial system risks that confront us today, let me start with a few words about the birth of GRI. Celebrating 10 years of GRI Imagine the economy is beginning to recover from the worst global recession since the Great Depression. You’ve seen unprecedented financial market volatility, with large parts of the market freezing up. While Canada has managed the crisis better than many countries, a collapse in oil prices, weak foreign demand and overwhelming uncertainty are all weighing on the Canadian economy. Needless to say, this scenario does not require much imagination—we are living it. But this scenario also describes Canada in 2009, as we began pulling out of the global financial crisis. And it describes the circumstances of GRI’s birth. In 2009, a number of us met in Ottawa to discuss why Canada had fared relatively well through the financial crisis and how to keep this advantage. The question many international colleagues asked was how did Canada, with its financial system deeply integrated with the United States, survive the crisis with no bank failures or bailouts? As much as we wanted to think that we were smarter or more prescient, the truth was more humbling. We had had our own financial failures in the 1980s and learned some hard lessons. The creation of the Office of the Superintendent of Financial Institutions helped make sure that we didn’t forget those lessons. As a result, as we headed into the global financial crisis, our capital standards were higher than global minimums, we had a cap on leverage, and we had invested in sound supervision and fostered a prudent— some would say cautious—risk culture. Our cautious nature is not usually celebrated. We often beat ourselves up for being too risk averse in Canada. But by 2010, sound risk management was looking more like a competitive advantage for Canada. It had protected Canadians from outcomes that could have been much worse. And we were convinced that in a future with a more globalized, tightly coupled and techenabled financial system, risk management would be more important than ever. In my mind at least, GRI was conceived at this meeting with the mission to preserve and grow Canada’s competitive advantage in risk management. Now, a decade on, GRI is celebrating a milestone birthday. It has grown up to be more than I imagined. GRI has been instrumental in building talent and capacity in risk management, from university graduates to board directors. And it has helped to build our understanding of how the financial system can better serve the real economy, supporting both resilience and growth. Since GRI was launched, a whole new set of financial risks has emerged, from the pandemic to cyber threats, climate change and more. Managing these risks requires new types of information and analysis, new skills, new insights and new frameworks. GRI is more vital and necessary than ever. 1/5 BIS central bankers' speeches So, happy birthday GRI, and my very best wishes for the next 10 years and beyond. Financial system risks Let me now spend a few minutes talking about that new set of risks. We learned from the global financial crisis that financial stability risks can come from outside our borders. But today, I’m going to concentrate on domestic sources of risk. I want to look at the risks to the recovery from the pandemic. I will then discuss some financial risks that will become more prominent as the economy recuperates. And I will end with a few words on the financial system risks related to climate change. The impact of the pandemic on lives and livelihoods is beyond anything we’ve experienced in our lifetimes. More than 3 million Canadians lost their jobs through March and April, and another 2.5 million saw their work hours reduced by more than half. We’ve regained about two-thirds of those jobs and hours worked. But it will be a long, slow climb to get everybody back working at pre-pandemic hours, particularly in the sectors most affected. Adding to the uncertainty, we appear to be in the early days of a second wave of COVID-19. Nobody wants to return to lockdown, but a second wave could test our resolve to practise physical distancing and keep the pandemic from spreading uncontrollably again. In Canada, governments have focused fiscal efforts on emergency relief, wage support and subsidy programs to protect Canadians and keep workers connected to employers. Federal agencies have also helped companies with a variety of credit support programs. The extensions of the wage subsidy and credit programs are now supporting recovery. The Bank of Canada has contributed to the recovery effort by keeping credit flowing and by providing considerable monetary stimulus. With core funding markets seizing up in March and April, the Bank launched a series of asset purchase programs to restore market functioning. These programs worked. Today, financial markets are functioning well. We also cut our policy interest rate to its effective lower bound and provided extraordinary forward guidance indicating that interest rates will be very low for a long time. This commitment has been reinforced with large-scale purchases of Government of Canada bonds. This quantitative easing program is working to reduce the cost of borrowing for households and businesses. Credit is flowing, and the financial system is acting as an important shock absorber during this crisis. As bold as these policy responses have been, a full recovery from the pandemic will take a long time, and many risks remain. How well all of us—individual Canadians, businesses, the health care system and governments—manage these risks will be a key factor in everyone’s well-being. The biggest risk is the future course of the pandemic itself. The risk that we could be contracting and spreading the virus is something we can, and must, all manage responsibly. For that, we should be guided by our public health officials. Risks to the recovery You won’t be surprised that my focus today is the financial risks of the pandemic. History—particularly the knock-on effects of severe recessions—can help us assess these risks. We can also look at the impact of natural disasters and extrapolate to the whole economy. For example, Bank staff have published a paper about the 2016 wildfires in Fort McMurray, Alberta.1 The parallels are instructive. Then, as now, we saw a rapid stop in economic activity caused by a sudden shock. Then, as now, much of the lost ground was regained quickly. But the 2/5 BIS central bankers' speeches episode left economic scars that took a long time to heal. One of the lessons from Fort McMurray is that households must remain able to manage income losses. This is particularly challenging for highly indebted households that dedicate a large share of their income to debt service. We know that about 20 percent of all mortgage borrowers don’t have enough liquid assets to cover two months of payments. Government income support has been instrumental in helping Canadians bridge this crisis, as has the response of Canada’s financial institutions. Since the pandemic began, Canadian financial institutions have allowed close to 800,000 households to delay payments on mortgages. They have also allowed deferrals on lines of credit and credit cards. This welcome flexibility has kept debt payments down for many households. But the six-month payment deferral period is ending for most borrowers, and the next few months will be crucial. To this point, the resumption of payments has been going quite well. Of the mortgages whose deferrals have expired, the vast majority have returned to regular payments. Only a few have received a second deferral, and even fewer have become delinquent. Obviously, this is an issue we will continue to watch closely. Some businesses are also finding it hard to meet fixed payments because the pandemic has slashed their revenues. The problem is particularly difficult in service industries such as accommodation, food and recreation. Companies in other sectors with limited cash buffers are also facing greater difficulty meeting their short-term obligations, including debt payments. Important parts of our commodity sector face particular challenges. And more generally, the longer the recovery, the greater the risk that cash flow problems can turn into solvency issues. In this vein, the government’s extension of its wage subsidy program into next year is welcome, both for businesses hurt by the pandemic and for their employees. So far, Canada’s financial system has shown its resilience. It continues to work as a shock absorber, helping Canadian households and businesses deal with the economic impact of the pandemic. Given the Bank’s system-wide perspective, we will continue to assess the risk that credit losses could become large enough and eat far enough into capital that banks need to tighten credit conditions. If this happens, our banking system would go from being a tailwind that supports recovery to being a headwind. At present, this risk appears to be well-managed. Canada’s big banks have strong capital and liquidity buffers, a diversified asset base and the capacity to generate income. They also have the protection of a robust mortgage insurance system. Let’s remember that after the global financial crisis, international capital and liquidity standards were raised considerably. Many countries, including Canada, supplemented the higher global minimums with additional buffers. These buffers are designed to be used in the event of a major shock, so the financial system can continue to support the real economy through bad times. This is a strength of a well-capitalized system, and the use of these buffers to support credit growth would be a positive sign that the recovery is being safeguarded without putting bank solvency at risk. Risks during recuperation I have already mentioned the extraordinary monetary policy actions that the Bank has taken to support the recovery. At our last interest rate announcement, we indicated that we would need to keep these supports in place for a long time. Without the fiscal and monetary policy actions, the economic devastation of the pandemic could have been much, much worse. But we know that this lower-interest rate environment will require insurance companies and pension funds to adjust. And our policy path will eventually have an impact on financial system vulnerabilities. We came into the pandemic with a number of vulnerabilities. A significant 3/5 BIS central bankers' speeches proportion of households were carrying high levels of debt. Some businesses were also more indebted, especially in commodity-related sectors. Some asset valuations—including housing— seemed high relative to fundamentals. And some institutional investors had elevated holdings of less liquid and risky assets. It also seems certain that we will exit the pandemic with higher levels of government debt. As much as a bold policy response was needed, it will inevitably make the economy and financial system more vulnerable to economic shocks down the road. We will watch the evolution of financial vulnerabilities closely, particularly given our commitment to keep interest rates low. The bulk of household debt consists of mortgages, and so we will monitor activity in housing markets. Many housing markets have bounced back strongly in recent months. Some of this is pent-up demand built up over the containment period, but there is no doubt the market is being supported by low interest rates. Indeed, this is one way that monetary policy is supporting the recovery. We will also watch for signs that housing markets are being driven higher by speculation that prices will keep rising. And we will watch whether people buying houses are taking on outsized debt relative to their income. We are not back to the frothy housing markets we saw in 2016, and we expect the bounceback in housing to dampen. But if too many Canadian households start to become dangerously over-leveraged, policy-makers have several macroprudential tools they can use. Our experience with the mortgage-interest stress test shows how effective these tools can be. The bottom line is that the private and public sectors together need to be acutely aware of financial system risks and vulnerabilities as the economy recovers. GRI has an important role to play in analyzing and highlighting these risks and keeping us focused on what may be coming down the road. Risks from climate change Finally, let me say a few words about a longer-term risk that is accelerating—the impact of climate change and the transition to a low-carbon economy. The financial system has a critical role to play to support the real economy through the transition and to help businesses and households manage new climate risks. To do this, the financial system has to both manage its own climate risks and help direct savings to productive and sustainable investment. Physical and financial risks from more frequent and severe weather events, including damage to assets such as real estate and infrastructure, will almost certainly grow. Many types of business also face significant transition risks related to the revaluation of assets and the reassessment of projected earnings and expenses. If not appropriately priced and managed, both types of risk have the potential to bring about significant losses for financial institutions and could even threaten the stability of our financial system. Sound risk management starts with sound measurement. Companies need reliable, consistent and comparable ways to measure and state their exposure to climate risks. Financial institutions, too, must understand and be transparent about their exposures. Investors are increasingly demanding this transparency. If we are going to do a better job assessing, pricing and managing climate risks, we need better and more decision-useful information that combines climate-data analysis with economic and financial information. This will make the financial system and the real economy more resilient. And it will strengthen the ability of the financial system to fulfill its most critical role, which is to allocate savings to its most productive uses. This will help Canadians take advantage of sustainable investment opportunities. 4/5 BIS central bankers' speeches As part of its responsibility to promote financial system stability, the Bank is accelerating its work to understand the implications of climate change for the Canadian economy and financial system. Last year, we developed a multi-year research plan focused on climate-related risks. And we joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). These efforts are beginning to bear fruit. The NGFS made recommendations on how companies should assess and disclose their climate-related risks, building on the recommendations of the Task Force on Climate-Related Financial Disclosures. They suggest that companies take a scenario-based approach and extend their assessments decades into the future. Bank staff contributed to this effort and are now developing Canada-specific climate scenarios.2 These will make it easier for financial institutions to use scenario analysis as a forward-looking tool to better assess and manage climate risks. Measuring, pricing and managing climate risks will require an all-hands-on-deck approach— involving the private sector, the public sector and the research community. I’m very pleased to see that climate change is one of GRI’s three big themes. GRI has a valuable role to play in bringing together financial services—banks, insurers and asset managers—to identify the most critical data gaps, pool climate-change research and build risk capacity. Conclusion It’s time for me to conclude. As we gather to celebrate GRI’s birthday, we can look back over the past decade with satisfaction that this institution has helped strengthen the resilience of our financial system and build Canada’s advantage in financial risk management. As we look forward, we can feel confident that GRI will be there to help us prepare for and manage the financial risks ahead. The COVID-19 pandemic has made it painfully clear that how well we mange risks has a huge impact on our well-being. Globally, I don’t think it’s an exaggeration to say that the quality of risk management will increasingly influence the success and stability of societies. Of course, I’m talking about much more than financial-risk management. But the financial services sector has a leadership role to play. Two historic recessions in just over a decade have underlined just how much managing risks in our financial system matters to the livelihoods of Canadians. As we begin to recover from the economic fallout of the pandemic and look to the vulnerabilities ahead, sound risk management is more critical than ever. Thank you. Now I would be pleased to take a few questions. I would like to thank Don Coletti for his help in preparing this speech. 1 O. Bilyk, A. T. Y. Ho, M. Kahn and G. Vallée, “ Household Indebtedness Risks in the Wake of COVID-19,” Bank of Canada Staff Analytical Note No. 2020–8 (June 2020). 2 E. Ens and C. Johnston, “Scenario Analysis and the Economic and Financial Risks from Climate Change,” Bank of Canada Staff Discussion Paper No. 2020–3 (May 2020). 5/5 BIS central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 28 October 2020.
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Tiff Macklem: Release of the Monetary Policy Report Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 28 October 2020. * * * Good morning. Thank you for joining Senior Deputy Governor Wilkins and me to discuss today’s policy announcement and Monetary Policy Report (MPR). Our main message today is that it will take quite some time for the economy to fully recover from the COVID-19 pandemic, and the Bank of Canada will keep providing monetary stimulus to support the economy through the recovery. Before turning to your questions, let me say a few words about our policy discussions. Obviously, the Governing Council spent a lot of time discussing the current status of the pandemic and its impact on our economy. Simply put, things really depend on how the pandemic evolves. We are basing our outlook on some particular assumptions about the virus. We assume authorities won’t need to reinstate the sort of extensive and widespread containment measures we saw in the spring. But we can expect successive waves of the virus to require localized and targeted restrictions. The need for these restrictions will ebb and flow, and gradually diminish over time. We are assuming that vaccines and effective treatments will be widely available by the middle of 2022. Finally, we expect that the fallout from the pandemic will have some long-lasting effects on future economic growth. Since the spring, we have developed a better understanding of the economic effects of containment measures and the impact of the government support programs. With this, and the recognition that the virus is going to be with us for some time, the Governing Council decided to go back to our normal practice of giving a projection for growth and inflation in the MPR. That said, let me stress that the projection is highly conditional on our assumptions about the virus. As expected, the Canadian economy bounced back in the third quarter as many businesses reopened. In fact, the rebound was a little stronger than we had anticipated at the time of the July MPR, but we are still over 700,000 jobs below our pre-pandemic level of employment. To put that in perspective, peak job losses in the Great Recession a little more than a decade ago were about 425,000. The current job losses are concentrated in service sectors, particularly in lower-wage jobs where physical distancing is difficult. This is why the income support programs put in place have been so important for the recovery. They have protected the most vulnerable and supported household spending, which has helped to underpin the recovery in consumption. Housing activity also rebounded sharply in the third quarter as sales made up ground that was lost in the containment phase. But outside of household and government spending, the economy has struggled. Investment and exports have increased but are still weighed down by uncertainty and weak demand. Meanwhile, the Canadian dollar has been a bit stronger than we assumed in July, despite continued low oil prices. The Governing Council agreed the very rapid growth of the reopening phase is now over and we are in the slower-growth recuperation phase. We expect fourth-quarter growth to be just barely positive—weaker than previously expected due to the resurgence in COVID-19 infections. For 2020 as a whole, we expect that the economy will have shrunk by about 5 1/2 percent. 1/3 BIS central bankers' speeches Looking out to 2021 and 2022, we are projecting annual growth to average almost 4 percent, with household spending leading the way. But we expect this growth to be uneven across sectors and choppy over time. Some parts of the economy will simply be unable to completely reopen until a vaccine is widely available, so sectors will recover at very different speeds. Moreover, as infection rates fluctuate, economic activity will continue to be affected by containment measures as well as consumer and business caution. We expect business investment to remain weak as uncertainty persists and exports to grow only slowly. When we add it up, the Governing Council projects that the economy will still be operating below its potential into 2023. Let’s now turn to inflation—our mandated goal. The most recent CPI inflation data came in at 0.5 percent, and it’s expected to stay below our 1 to 3 percent target range until early next year. After that, it is projected to rise gradually, but stay below 2 percent throughout the projection horizon. The Governing Council also spent a fair bit of time discussing longer-term issues. We know the pandemic is reducing investment and is likely to cause long-lasting damage to some people’s job prospects. These forces will reduce Canada’s economic potential. We have substantially marked down our estimate for Canada’s potential growth to about 1 percent a year through 2023. I explained earlier how our outlook is highly conditional on assumptions about the virus. Beyond these, it is also subject to several important risks. For example, it’s possible that consumption could be stronger than expected if households quickly reverse the buildup in savings they have accumulated since the start of the pandemic. In contrast, an economic setback could lead to a sharp tightening of financial conditions, further slowing both growth and inflation. The Governing Council sees the risks around the projection to be roughly balanced. But it’s important to remember that we are operating at the effective lower bound for our policy interest rate and inflation is well below target. So, we are particularly focused on the downside risks to our projection. Given the outlook, the Governing Council agreed that extraordinary monetary policy support will continue to be needed. Accordingly, we will continue to hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our current projection, this takes us into 2023. We are providing exceptional forward guidance combined with a full economic projection to provide as much clarity as we can to Canadians in an environment of considerable uncertainty. Our forward guidance is being reinforced and supplemented by our quantitative easing (QE) program. We are recalibrating our program of government bond purchases, and I want to take a moment to explain what we are doing and why. At the outset of the pandemic, our bond purchases were focused on restoring orderly market conditions, and we concentrated on buying bonds with shorter maturities where issuance was strongest. Now that markets are functioning well and the yields on shorter maturity bonds are well anchored by our forward guidance, we can concentrate more of our bond purchases at longer maturities. Shifting our purchases to longer-maturity bonds increases the amount of monetary stimulus provided per dollar purchased. That’s because it focuses more directly on the borrowing rates that are most relevant for households and businesses. Given the expected impact from buying more longer-term bonds, the Governing Council judges that, as we gradually reduce our total weekly bond purchases from at least $5 billion to a minimum of $4 billion, our QE program will continue to provide at least as much stimulus as before. This recalibration of the program will increase its effectiveness. The QE program will continue until the recovery is well underway. We are committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective. 2/3 BIS central bankers' speeches With that, Senior Deputy Governor Wilkins and I will now be happy to take your questions. 3/3 BIS central bankers' speeches
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Remarks (delivered virtually) by Ms Carolyn A Wilkins, Senior Deputy Governor of the Bank of Canada, at the Munk School of Global Affairs and Public Policy, Toronto, Ontario, 12 November 2020.
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Remarks by Carolyn A. Wilkins Senior Deputy Governor of the Bank of Canada Munk School of Global Affairs and Public Policy November 12, 2020 (via webcast) Exploring life after COVID-19: the far side of the moon “Anticipating problems and figuring out how to solve them is actually the opposite of worrying: it’s productive.” — Chris Hadfield, An Astronaut’s Guide to Life on Earth Introduction Good afternoon and thank you for joining me. Thanks also to the Munk School for the invitation. Given what’s going on in the world today, healthy debate around global affairs and public policy is more important than ever. It’s hard to believe that the COVID-19 pandemic was declared almost exactly eight months ago. Canadians have been affected on so many fronts—in our workplaces and in our homes. There are still more than 40,000 active cases and more reported every day—but we’ve heard some good news recently about vaccines. I’m happy to see the economic recovery underway. However, the pandemic is still in full throttle, so we continue to face considerable challenges. Today, I’d like to take us beyond the current context and discuss what we will need to thrive in the post-pandemic world. Right now, the future may feel like the proverbial far side of the moon. Much of what we knew about the moon 70 years ago was based on the side we could see from the earth. Like the explorers back then, many among us feel compelled to consider the unknown—to shed light on the dark side. I would like to thank Thomas Carter and José Dorich for their help in preparing this speech. Not for publication before November 12, 2020 1:30 PM Eastern Time -2Right now, many unknowns obscure our vision, but we can still map out economic scenarios that will help us plan our path forward. In the Bank of Canada’s most recent outlook, published in the October Monetary Policy Report, we expect the recovery in Canada and around the world will continue. The recovery will take time, however, and will require policy support for a while. Taking a longer perspective, we expect that COVID-19 will leave an unfortunate economic legacy through its impacts on investment, the work force and productivity. In our most recent projection, this adds up to a situation where Canada is likely to exit the pandemic with a lower profile for potential output. That means a significantly diminished ability to generate goods, services and incomes on a sustainable basis. And many of those scars could become permanent without deliberate actions from all of us. I’d first like to walk you through what is driving our revised estimates of potential output. Next, I’ll talk about the need to boost these numbers to raise the prosperity of Canadians and help manage the high debts we now face. I’ll end with how the Bank will provide a strong and stable foundation to build on. Exploring the far side Economists use the idea of potential output to think about what the economy can produce if it’s operating at full capacity—if everyone who wants a job is either employed or able to find a job quickly, and if all the available capital is put to full use. As a result, potential output depends on our capital stock, our labour force and our productivity. Potential output is important for central bankers because it helps gauge inflation pressures. It’s important to Canadians because it determines our capacity to generate the income needed to spend, save, borrow and pay down debt. I’m starting here because many of you are wondering how we are going to service the debts that will emerge from the pandemic. Like the far side of the moon, potential output cannot be directly observed. Economists use specialized tools and a dose of judgement to get a picture of it— and the picture isn’t pretty.1 When it comes to the global economy, we’ve revised our estimate of potential output growth over the next few years from about 3¼ percent to 2½ percent.2 The downward revisions are across all regions and in countries important to Canadian exporters, such as the United States. The new estimate of potential output growth for the United States is now around 1¼ percent, when it was nearly 2 percent before COVID-19. Canada’s potential 1 For details, see D. Brouillette, J. Champagne and J. Mc Donald-Guimond, “Potential Output in Canada: 2020 Reassessment,” Bank of Canada Staff Analytical Note 2020-25 (October 2020). 2 For further details, see X. S. Chen, A. Jaffery, G. Nolin, K. Salhab, P. Shannon and S. Sarker, “Assessing Global Potential Output Growth: October 2020,” Bank of Canada Staff Discussion Paper No. 2020-10 -3output growth has been downgraded even further, from around 1.8 percent to a bit less than 1 percent. So, what are the main factors driving these results? The first factor relates to capital. Investment in capital has taken a hit and the recovery will be protracted, meaning slower growth in the stock of capital. Weaker aggregate demand and higher uncertainty will cool the appetite to invest among many firms while forcing others to shutter entirely. In Canada, this is compounded by COVID-19’s impact on oil prices and investment in the energy sector. Overall, weaker capital accumulation explains about three-quarters of the downgrade in potential output growth for Canada over the next few years. Two other factors account for the remaining quarter of the downgrade, which is about evenly split between them. The first of these factors has to do with the work force. We expect to see what economists call “scarring”: many people who were in the work force may become discouraged from a particularly difficult job search or may not yet have the skills for the jobs available. The hardest-hit sectors include recreation and hospitality, which employ many young people, recent immigrants and women. These groups are particularly at risk of being left on the sidelines for an extended period. For Canada, the strong efforts of governments to preserve attachments between people and employers—through wage subsidies and other programs—will help limit these unfortunate outcomes. But they can’t be offset completely. The remaining factor relates to productivity. We expect there will be disruptions in labour markets and challenges reallocating resources across firms and sectors. All of this will weigh on productivity growth. Some businesses have told us they are interested in making their production and supply chains more regional and resilient. This will deliver increased stability but will likely come at a small cost in terms of productivity. Now, even with the downgrade, the trend growth in gross domestic product (GDP) is still expected to exceed the neutral rate of interest—the policy rate where the Bank is neither stimulating the economy nor holding back growth. Our revised estimates of this rate in nominal terms have been lowered by 50 basis points to a range centred on 2¼ percent.3 Right now, this makes the arithmetic of government debt sustainability more reassuring. However, we still need to be mindful of history, which shows that this arithmetic can reverse.4 What’s at stake All told, we expect the level of Canadian potential output to be about 3 percent lower by the end of our projection horizon in 2022, relative to what we expected 3 See D. Matveev, J. Mc Donald-Guimond and R. Sekkel, “The Neutral Rate in Canada: 2020 Update,” Bank of Canada Staff Analytical Note 2020-24 (October 2020). 4 See W. Lian, A. F. Presbitero and U. Wiriadinata, “Public Debt and r – g at Risk,” IMF Working Paper No. 20/127. -4at the time of our last update (Chart 1). That’s around $70 billion—more than $2,000 on average for every member of the working-age population. That’s not just in 2022, but every year afterward unless potential output growth picks up enough to close the gap. Chart 1 : Canada likely to exit the pandemic with significantly diminished productive capacity Can$ (billions) Potential output in chained 2020 dollars, quarterly frequency 2,500 Approx. 3%, or $70 billion 2,400 2,300 2,200 October 2020 update Source: Bank of Canada estimates and projections Last update before COVID-19 (April 2019) Last data plotted: 2022Q4 I want to take a minute to explain why we should set our sights higher. Even before the pandemic, many were saying we should slow down, focus more on happiness and health than on the hamster wheel of production and consumption. It’s hard to argue with that. Still, stable jobs and incomes are foundational to wellbeing, and stronger growth helps deliver that.5 Strong, sustainable growth would also help us to manage the heavy debt load that has piled up over the last decade and will continue to do so because of COVID-19. In 2009, when the global financial crisis was in full force, Canadian households, governments and non-financial businesses owed debts totalling about 215 percent of GDP. That number had risen to around 250 percent just before the onset of COVID-19.6 It would have been 275 percent if GDP had grown by 1 percentage point less per year over that period—a drop roughly in line with our revised estimate of potential output growth. This arithmetic shows 5 For example, studies show that income (up to threshold levels) is significantly related to measures of emotional well-being and life satisfaction. Among others, see A. T. Jebb, L. Tay, E. Diener and S. Oishi, “Happiness, Income Satiation and Turning Points Around the World,” Nature Human Behaviour 2, no. 1 (January 2018), 33–38. Studies also suggest that financial and jobrelated hardships can have lasting effects on households’ mental health. See, e.g., M. K. Forbes and R. F. Krueger, “The Great Recession and Mental Health in the United States,” Clinical Psychological Science 7, no. 5 (July 2019): 900–913. 6 For details, see “Box 4: Debt in the Canadian economy,” in Bank of Canada Financial System Review—2020 (May 2020). -5how growth can change our collective room to deal with the pandemic. It can also change investors’ and credit rating agencies’ views of the risks. Debt is a problem we share with many other countries. Countries such as Canada that depend on foreign capital and are running significant current account deficits are even more vulnerable.7 This vulnerability is kept in check here at home by a sound record of prudent financial risk management and robust oversight of our financial institutions. However, there’s no doubt that the debt burden would be easier to carry with a stronger trend line on incomes and the tax base. Priorities and principles for the future When it comes to people’s financial well-being, growth per capita and how it is distributed matter a lot. In the 10 years before COVID-19, Canadian GDP growth averaged about 2¼ percent per year, near the top among G7 countries. GDP growth on a per capita basis, however, averaged around 1 percent, near the bottom of that pack. Why was this? Productivity gains were much lower in Canada, so economic growth was fuelled mainly by increasing the population through immigration. Canada is good at attracting highly qualified immigrants, and the federal government’s recent plan to lift immigration levels will boost potential output growth over time. Still, we can’t afford to lose sight of productivity and competitiveness. In our consultations with businesses, they often bring up factors that are dampening their desire to make productivity-enhancing investments here at home. These factors include regulatory burdens, uncertainty surrounding approval processes and obstacles to interprovincial trade. The fallout from COVID-19 won’t necessarily help matters either. Lower productivity is not just about inefficient production lines and lower profits. It’s also about access to critical infrastructure in remote areas and diagnostics and treatments in health care. You may ask how we can improve our productivity performance during a crisis— but there may be no better time. We can take inspiration from innovation that followed major wars. While analogies between the COVID-19 pandemic and wars are imperfect, both events force governments and businesses to adapt at speeds they previously thought impossible. In the case of World War II, many of those innovations set the scene for stunning advances, from mass manufacturing of antibiotics to the beginnings of modern computing. The growth that followed the war was instrumental in raising living standards and reducing the massive government debt that had accumulated during the conflict. The rapid changes forced by COVID-19 are also impressive. Canadian companies moved millions of employees to remote work, even as they enhanced 7 See D. Dodge, “Two Mountains to Climb: Canada’s Twin Deficits and How to Scale Them,” Public Policy Forum Report (September 14, 2020). See also G. Bruneau, M. Leboeuf and G. Nolin, “Canada’s International Investment Position: Benefits and Potential Vulnerabilities,” in Bank of Canada Financial System Review (June 2017): 43–57. -6their digital services. Massive shifts were made in production and supply chains to secure medical supplies. All of these innovative responses demonstrate what we can do when we set our sights on something. There’s been a lot of good discussion already around international and domestic tables about how to generate economic prosperity. There’s a growing consensus here at home that policies and investments are needed in areas that provide a long-term return: education, infrastructure and technology top many lists, as do investments in greening the economy. How exactly these are designed, however, is the subject of much debate. As a central banker, I won’t wade into that. Instead, I’ll talk about the conventional wisdom that we’ll need to challenge as we hammer out a growth strategy. Three challenges top my list. Some are being left behind First, we must address the reality that market forces will leave some people behind. Let’s take the example of technological change, since digitalization is a promising source of improved competitiveness and has been accelerated by COVID-19. Conventional wisdom says that we should embrace technological change because it will create more jobs than it will destroy. History bears this out. Around the time of Confederation, about half of working Canadians were employed in agriculture. Over the following decades, various innovations—including the home-grown invention of Marquis wheat—allowed a growing population to be fed by fewer workers. Today, the share of workers in agriculture is less than 2 percent. All those jobs weren’t simply lost. New positions were created in the manufacturing and service sectors as the economy grew, and these now account for the majority of employment in Canada. The same dynamic with innovation is true today in that more jobs are created than destroyed. A recent study by Statistics Canada finds that Canadian firms that adopted robots over the past two decades tended to hire more people overall.8 What conventional wisdom glosses over, however, is the significant transition costs that are borne unevenly across households. Even as the economy as a whole benefits from technological advances, sectoral shifts can leave certain groups without jobs and facing obstacles to finding new work. The study I just mentioned links the adoption of robots with higher turnover and net layoffs for some groups of workers. Other research finds that the decline in Canadian manufacturing since the early 2000s took a disproportionate toll on men in terms of employment and wages.9 We know that individuals, their families and communities can often struggle for years during transitions triggered by technological change. 8 See J. Dixon, “The Effects of Robots on Firm Performance and Employment,” Statistics Canada Economic Insights No. 2020024 (November 2, 2020). 9 See Statistics Canada, “Study: The Impact of the Manufacturing Decline on Local Labour Markets in Canada,” The Daily (January 15, 2020). -7Innovations in recent decades in advanced economies have also contributed to the rise of superstar firms with considerable market power. We’ve seen this before: think of the railways well over 100 years ago. The modern winner-takesall effect is magnified because user data have become a new source of monopoly power.10 That’s good news for shareholders and workers who have the special skills that superstar firms need. However, it may mean that a handful of firms now account for an outsized share of the jobs in a given industry or town, leaving many other workers with less bargaining power and stagnant wages. This dynamic has likely contributed to weak wage growth in many countries over recent years.11 I think digitalization should be embraced, but we also need to decide how best to help those individuals who are adversely affected. As I said earlier, investing in education is at the top of the list for many. That includes investing in continuous learning. Investments like these boost social mobility, and they have the added benefit of improving skills in the workforce, which in turn helps potential output growth. This hits home for me, and I’ll bet for many students in the audience. I haven’t stopped learning since I left university in the last century. Way back then, many things I’ve worked on—including blockchain and cryptocurrencies—didn’t even exist. I’d also like to put strengthened competition and antitrust policy on the table, particularly when it comes to global tech giants. And the reforms to international tax policies led by the Organisation for Economic Co-operation and Development and G20 are needed so that globally active digital companies contribute their fair share.12 Statisticians and academics can help inform the debate in this area— with better data on the digital economy and more research into how digitalization affects different groups in society.13 10 Among others, see I. A. Ibarra, L. Goff, D. J. Hernández, J. Lanier and E. G. Weyl, “Should We Treat Data as Labor? Moving Beyond ‘Free,’” American Economic Association Papers and Proceedings 108 (May 2018): 38–42; M. Farboodi, R. Mihet, T. Philippon and L. Veldkamp, “Big Data and Firm Dynamics,” American Economic Association Papers and Proceedings 109 (May 2019): 38–42; and C. I. Jones and C. Tonetti, “Nonrivalry and the Economics of Data,” American Economic Review 110, no. 9 (September 2020): 2819–2858. 11 See C. A. Wilkins, “A Look Under the Hood of Canada’s Job Market” (speech to the Toronto Region Board of Trade, January 31, 2019). 12 Among others, see Organisation for Economic Co-operation and Development, Tax Challenges Arising from Digitalisation—Interim Report 2018 (March 16, 2018). 13 For examples of existing work, see International Monetary Fund, “Chapter 3: Understanding the Downward Trend in Labor Income Shares,” World Economic Outlook April 2017 (IMF, 2017); and G. Michaels, A. Natraj and J. Van Reenen, “Has ICT Polarized Skill Demand? Evidence from Eleven Countries over Twenty-Five Years,” Review of Economics and Statistics 96, no. 1 (March 2014): 60–77 -8Social goals can support economic goals This leads me to my second challenge. We need to reject the idea that there is an inevitable trade-off between social and economic goals. Human well-being is needed for economic growth, and the reverse is often true as well. There’s growing evidence that lower levels of inequality may make the economy less vulnerable to financial crises or periods of stagnation.14 Quebec’s public daycare system is a prominent example of a policy that creates a virtuous circle between social and economic goals: it helped families and also increased women’s participation in the labour force. In fact, it helped transform Quebec from a province with one of the lowest participation rates among primeage women to a national leader in this regard.15 There are other examples, including the public policy response to the pandemic. Wage subsidies are helping maintain relationships between workers and employers, which in turn protects future growth. Canada could also be made more resilient through policies that encourage equity rather than debt financing as a way to foster business creation and growth and support vibrant communities. The public sector can’t do it alone My third challenge to conventional wisdom is the realization that this is not only a public sector problem to solve. We need private sector investment in growthenhancing initiatives and smart incentives to go along with that. Investment in green technology is just one example of how the private sector can pitch in to support longer term growth. Canada’s oil and gas sector has shown tremendous capacity to innovate in the face of challenges and is making great strides in developing new technologies to reduce emissions. Think of investments in cogeneration technologies—an innovation that increases efficiency and competitiveness while also reducing carbon footprints.16 And financial firms are working to develop the market for green and transition bonds to increase financing options for climate-related projects. We’ve also seen some good examples of stakeholder capitalism in response to the pandemic as the private sector found ways to support growth. Many financial institutions stepped up to allow deferrals in loan and mortgage payments. This 14 Among others, see P. Pascal, “Historical Patterns of Inequality and Productivity Around Financial Crises,” Federal Reserve Bank of San Francisco Working Paper No. 2017-23 (March 2020); and A. G. Berg and J. D. Ostry, “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” International Monetary Fund Staff Discussion Note No. 11/08 (April 2011). See also L. H. Summers, “U.S. Economic Prospects: Secular Stagnation, Hysteresis and the Zero Lower Bound,” Business Economics 49, no. 2 (April 2014): 65–73. 15 For details, see P. Fortin, L. Godbout and S. St-Cerny, “Impact of Quebec’s Universal Low-Fee Childcare Program on Female Labour Participation, Domestic Income, and Government Budgets,” Working Paper; and B. Petersson, R. Mariscal and K. Ishi, “Women Are Key for Future Growth: Evidence from Canada,” IMF Working Paper No. 17/166 (July 2017). 16 For more information, see “7 Facts on the Oil Sands and the Environment,” Natural Resources Canada, March 15, 2019. -9complemented public sector actions to help families weather income loss and also allowed banks to avoid some loan losses. The Bank’s stake We can’t raise growth on a sustainable basis without economic stability, and we know that recessions tend to hit hardest those who can least afford it. The COVID-19 experience is no exception. That’s where the Bank comes in. Our mandate is to promote the economic and financial welfare of Canada. For us, that means targeting low, stable and predictable inflation and supporting financial stability. For nearly 30 years, our success in achieving our 2 percent inflation target has provided a solid foundation for growth and more certainty for businesses and families as they plan their finances and investments. This target is part of an agreement with the federal government that has been reviewed every five years since 2001. In the review that’s underway right now, my colleagues and I chose to challenge the conventional wisdom that our current regime is still the best we can do. While we have some results from our research on alternative frameworks, we still need to consider comments we’ve received from experts as well as feedback from our online survey.17 It’s too early to draw firm conclusions, but you can be sure that when we settle on an agreement with the government next year, it will be clear why we think it is in the best interest of Canadians. The Bank also supports the stability of the financial system. One of the ways we do that is with our analytical work on risks to the financial system linked to climate change. We have been working with experts here at home, and globally, to develop a set of climate scenarios to better understand potential climaterelated risks and opportunities for the Canadian financial sector. Knowing what the future could look like under different scenarios helps all of us prepare for what’s ahead. Another way we support the financial system is through our work on core financial market infrastructure. State-of-the-art payments systems are key to the competitiveness of Canadian businesses and to financial stability. That’s why the Bank has been working with Payments Canada to modernize them. We’ve also stepped up our work on a central bank digital currency given that COVID-19 has accelerated the use of digital payments. We’re early in the technical development phase in collaboration with the private sector, other central banks and the Bank for International Settlements. While no decision has been made yet on whether to issue a digital currency, both universal accessibility and financial stability are key objectives. 17 For details, visit “Let’s Talk Inflation,” Toward 2021: Outreach, Bank of Canada. See also C. A. Wilkins, “Closing Remarks” (speech at the Bank of Canada Workshop, Toward the 2021 Renewal of the Monetary Policy Framework, August 26, 2020). - 10 - Conclusion Time to conclude. It’s not lost on me that I’m urging exploration of the far side of the moon—life post-pandemic—while life here on earth is still difficult. The COVID-19 pandemic remains a formidable obstacle to both our health and economic prosperity. We can’t have one without the other. Governments are acting decisively, and monetary policy is complementing these actions by creating financial conditions that support growth. It’s not too early for an open discussion about life after COVID-19. The pandemic has damaged the potential for Canada, and other countries worldwide, to generate sustainable economic activity. We need to set our sights higher to help businesses create good jobs and to make high debt loads more manageable. We need to recognize that social and economic goals are often self-reinforcing, not conflicting. This applies to many public and private initiatives, whether they are designed to green the economy, promote investment in critical infrastructure and technology, or help workers succeed in the labour market. It’s been heartening to see that the pandemic has brought Canadians together in many ways, despite our important differences. We’ve been forced to adapt quickly on many fronts. Let’s use that impetus to propel us in a better direction— toward investments that boost sustainable and inclusive growth in the long term. Like the explorers all those years ago, we will find light on the far side of the moon. In this case, however, how brightly it shines depends on us.
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Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, at the Public Policy Forum, Ottawa, Ontario, 17 November 2020.
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Tiff Macklem: Panel remarks Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, at the Public Policy Forum, Ottawa, Ontario, 17 November 2020. * * * I am very pleased to be here today, and I want to commend the Public Policy Forum for organizing this event. Chairing the Expert Panel on Sustainable Finance was a rewarding experience. It was a privilege to work with the other panel members—Barbara Zvan, Andy Chisholm and Kim Thomassin. Together we met with hundreds of business leaders, financial experts and organizations across Canada. I’ve taken a new job since the panel submitted its final report, and with it comes new responsibilities. And even though the phrase climate change doesn’t appear in the Bank of Canada Act, the central bank has a clear interest in this issue. The Act instructs the Bank “to promote the economic and financial welfare of Canada.” To carry this out, we need to understand the major forces on our economy. Climate change and the transition to low-carbon growth will have profound impacts on virtually every sector of the economy in the decades ahead. So, to fulfill our monetary policy remit, we need to understand the implications of climate change for economic growth and inflation. This is no different than our need to understand other major forces on the economy like technological change, an aging population and the ever-shifting dimensions of globalization. The effects of climate change are also important for the Bank’s responsibilities regarding the financial system. It’s our job to promote an efficient and stable financial system. This is where our connection to sustainable finance is most obvious. A well-functioning—and efficient—financial system has the important job of channelling savings to the most productive investments. Finance is not going to solve climate change, but many of the investments and innovations that will are very capital-intensive. That’s why it’s so important for the financial system to steer capital to the most-promising sustainable investments. The financial system also plays a critical role in helping households and businesses manage new climate risks. This includes both the physical risks associated with more extreme and more frequent weather events and the transition risks related to the revaluation of assets and the reassessment of projected earnings. A stable financial system is one that is itself resilient to these physical and transition risks. As the expert panel highlighted in its final report, transition risks are often mispriced, and physical risks are generally underappreciated. The longer that persists, the greater the risk of a sharp repricing, with the potential for substantial losses for financial institutions. At a minimum, this would impair the ability of the financial system to support the real economy and could even threaten the stability of our financial system. The efficiency and stability of our financial system in the face of climate change are closely linked and mutually reinforcing. By accelerating climate-smart capital flows, the financial system can reduce the risk of an abrupt and destabilizing adjustment. And by identifying, measuring and managing physical and transition risks, the financial system will improve the allocation of capital. Information and disclosure are essential for the financial system to be able to do its job. Companies need to assess, price and manage their climate risks, and they need to disclose these risks for markets to function well. This means companies must have reliable, consistent 1/3 BIS central bankers' speeches and comparable ways to measure and state their exposures. Financial institutions, too, must understand and be transparent about their own exposures. Nothing I’ve said is particularly new, but these issues are taking on increased urgency. Severe weather events are happening more often and with greater intensity, damaging real estate and infrastructure. More alarming still, scientists have high confidence that temperatures continue to warm rapidly, and this will contribute to more heat waves and an increased frequency of heavy rainfall. If we are going to overcome the threat posed by climate change, we—the world—need to move faster. There is also another reason for urgency here in Canada. How well we address climate change is becoming a competitiveness issue for Canadian businesses. Consumers, workers and investors increasingly care about the environmental footprint of the products they buy, of the companies they work for and of the businesses they invest in. As a result, climate change is becoming an immediate bottom line business issue. A decade ago, in the wake of the global financial crisis, climate-change issues faded into the background. By contrast, today’s pandemic seems to have focused the public’s attention on extreme global risks and the value of resilience. In financial markets, global issuance of environmental, social and governance (ESG) bonds has exploded in recent years and has not missed a beat so far through the pandemic. The flow of money into ESG funds this year is roughly double that of last year, which was itself about triple that of 2018. More than $US1 trillion of ESG bonds are now outstanding. And Canadian ESG issuance has also jumped—by more than six times in the past three years, going from less than $2 billion in 2017 to almost $13 billion so far this year. It’s crucial that Canadian companies can capitalize on these opportunities. For all these reasons, the Bank of Canada is accelerating its work to understand the implications of climate change and promote a climate-ready financial system. In 2019, we began assessing climate-related risks in our Financial System Review. And we developed a multi-year research plan focused on climate risks to the macroeconomy and the financial system. This is a significant priority for us, and will continue to be so. Climate change is, of course, fundamentally a global problem, and so we have expanded our international engagement. We are working with several partners to develop strategies for mitigating transition risks and promoting sustainable finance. The Bank has been particularly active at the Network for Greening the Financial System (NGFS), and is also working with the International Monetary Fund and the Financial Stability Board among others. It’s imperative that the Bank be involved with bodies such as the NGFS because they are encouraging sustainable finance by developing de facto global standards for climate-related disclosures. It’s far better for the Bank to be in the room where it happens, bringing the perspective of a diversified and resource-rich economy to the table. Bank staff have made important contributions to the work of the NGFS to promote a scenariobased approach to disclosures of climate-related risks. Uncertainty can no longer be an excuse for inaction. Using the publicly available scenarios developed by the NGFS, companies should be able to begin to describe the resilience of their organizations and strategies based on different climate scenarios. The Bank is also working to bring this analysis home to Canada. Specifically, we are working to develop climate scenarios that reflect Canada’s realities for Canadian financial institutions to use. Yesterday, we had a joint announcement with the Office of the Superintendent of Financial Institutions (OSFI) about a pilot project involving a number of Canadian banks and insurance 2/3 BIS central bankers' speeches companies. The Bank and OSFI are developing scenarios for institutions to use to explore how their businesses and holdings may be exposed to climate-related risks. The project has a few goals. By developing climate scenarios that are relevant to Canada, we hope to encourage financial institutions to use scenario analysis. We also hope a common set of scenarios will make the results more comparable. More fundamentally, we hope that scenario analysis will help financial institutions better understand their exposures to transition risks, and this will increase their confidence in their ability to disclose them. In summary, we are committed to working with the financial sector to promote resilience to climate change and a smooth transition to low-carbon growth. Last month, the Task Force for Climate-related Financial Disclosures released its third status report. It had good things to say about Canada and our country’s support for implementing its recommendations. But, to be frank, we all need to pick up the pace. So, here’s the message I want to leave with you: our financial system proved to be resilient during the global financial crisis and has been a key shock absorber so far through the COVID-19 pandemic. We need to ensure the financial system is just as resilient in the face of climate change. And in doing so, we need to position Canada to seize the climate-smart opportunities that consumers, workers and investors are looking for. But to mitigate the threat and capitalize on the opportunity, we all need to mobilize. And we need to do it quickly. 3/3 BIS central bankers' speeches
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Remarks (delivered virtually) by Mr Paul Beaudry, Deputy Governor of the Bank of Canada, to the Greater Moncton Chamber of Commerce, the Fredericton Chamber of Commerce, and the Saint John Region Chamber of Commerce, Fredericton, New Brunswick, Moncton, New Brunswick, Saint John, New Brunswick, 10 December 2020.
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Remarks by Paul Beaudry Deputy Governor Fredericton, New Brunswick, Moncton, New Brunswick, Saint John, New Brunswick December 10, 2020 Delivered virtually Our quantitative easing operations: looking under the hood Introduction Good afternoon and thank you very much for the kind introduction, John. I’m really pleased to have the opportunity to talk with all of you today—even if we are doing so virtually and from opposite coasts. I’m now a resident of Canada’s west coast, but I hold fond memories of time spent vacationing in the Maritimes from my home town of Québec. As you know, the Bank made the decision yesterday to maintain our target for the overnight rate at 0.25 percent, and we’ll spend some time discussing that later. But first, I want to talk about some of our actions to address COVID-19 and the immense challenges this pandemic poses to the financial well-being of Canadians. Since the pandemic hit in March, we have taken swift and decisive actions to help Canadian households and businesses bridge this short-term crisis. But we are also concerned with providing a strong foundation for longer-term recovery. In the face of the pandemic, we lowered our policy interest rate to 0.25 percent to ensure lower borrowing costs for households and businesses. We have committed to maintaining our policy rate at the current level until our inflation objective is achieved. We also launched nearly a dozen liquidity facilities and asset purchase programs to keep markets functioning and credit flowing as well as to allow interest rate cuts to work their way through the economy. I would like to thank Stéphane Lavoie, James MacGee and Jonathan Witmer for their help in preparing this speech. Not for publication before December 10, 2020 1:30 pm Eastern Time -2Today, I’ll discuss our main large-scale asset purchase program—the Government of Canada Bond Purchase Program1—in greater detail. We commonly refer to this program as quantitative easing. What’s important to remember about this and other programs is that they are all grounded in the same policy framework that has served Canada well for years. Each of our actions has been designed to return the economy toward its full capacity to support our 2 percent inflation target. With this in mind, I would like to clarify some of the mechanics of and potential misinterpretations about our quantitative easing—or QE—program. When we conduct QE, the Bank purchases bonds in the secondary market that were previously issued by the Government of Canada. This program has expanded our balance sheet, which has generated considerable attention and some concern. The most common questions we get are: How do we buy these assets? How do we pay for them? Are we financing the federal government’s debt? And, are we in danger of igniting high inflation through this process? So let’s take some time to talk about QE: what it does, what it doesn’t do, and how it works. Because monetary policy works best when it’s well understood. What quantitative easing does As I just mentioned, the Bank’s primary monetary policy goal is to achieve our 2 percent inflation target on a sustainable basis. To do that, we strive to keep the economy’s production as close to capacity as possible. This is particularly important in times like these, when inflation is well below target and unemployment is high. Our policy interest rate is the overnight rate. It is our main policy tool in normal times. The overnight rate has a direct impact on the cost of borrowing over very short terms. Increases or decreases in the policy rate also shape the market’s expectations of future overnight rates. In turn, this affects longer-term borrowing and lending rates. Through this channel, the Bank influences the cost of credit for Canadian households and businesses. This influences spending and investment decisions—and, ultimately, inflation. But the policy rate isn’t the only way we can affect the longer-term interest rates that matter to Canadians. When we can no longer reduce our policy rate, we need to dig deeper into our tool kit if we want to further stimulate the economy. One important instrument in our extended tool kit is QE, so let me begin by explaining how QE affects interest rates. When the Bank buys government bonds of a given maturity, it bids up their price. This, in turn, lowers the rate of interest that the bond pays to its holders. When the interest rate on government bonds is lower, this transmits itself to other interest rates, such as 1 For more information, see the Bank’s Government of Canada Bond Purchase Program web page. -3those on mortgages and corporate loans. This stimulates more borrowing and spending, which helps inflation move closer to the 2 percent inflation target. So, as you can see, even when the overnight rate can no longer be reduced, the Bank can still affect longer-term interest rates by using QE. How quantitative easing works Let’s turn our attention now to the mechanics of QE. Every week, the Government of Canada sells bonds to financial institutions—mostly commercial banks—that have been approved to participate in their auctions. Under QE, the Bank buys these bonds from auction participants, not directly from the government. The Bank conducts QE operations through a reverse auction. When you think of an auction, you probably imagine someone selling goods, with people bidding to purchase them. When we conduct QE, we call it a reverse auction because it’s the opposite: we hold an auction to buy—not sell—government bonds. We announce our intention to buy a certain quantity of bonds on a given day. We then receive offers from market participants who wish to sell us some of the bonds they hold. The bidding process is competitive, and we typically receive many more offers to sell than we are willing to buy. This is good because it means we can purchase bonds that are offered at the lowest price. We are currently buying a minimum of $4 billion a week of bonds through this process. Overall, we have purchased slightly more than $180 billion since the program was launched in March. That’s a big number. And it’s true that our QE program and other asset purchases led to a substantial increase in the Bank’s balance sheet. But despite all the purchases we’ve made, it is worth noting that the value of the assets we hold for the size of the Canadian economy remains relatively low by international standards—roughly two-thirds of that of the Bank of England or US Federal Reserve (Chart 1). -4Chart 1: The Bank of Canada’s balance sheet remains relatively low Central bank total assets as a percentage of a four-quarter average of Gross Domestic Product, quarterly data % % Bank of Japan (left scale) US Federal Reserve (right scale) Bank of England (right scale) Bank of Canada (right scale) European Central Bank (right scale) Reserve Bank of Australia (right scale) Sources: Bank of Canada, Bloomberg Finance L.P., national sources via Haver Analytics and Bank of Canada calculations Last observation: 2020Q3 Of course, when we buy these bonds through our auction, we need to pay for them. But we don’t print new bank notes to do so. Rather, we pay for them by issuing a particular form of liability. For anyone who knows the basic principles of accounting, you know our balance sheet has to, well, balance. The bonds we purchase become an asset for us, so we need a liability on the other side to pay for them. Here’s an example. If we buy $100 million of government bonds from Bank A, we pay for them by issuing what are called settlement balances. These appear as deposits with the Bank of Canada. Just like commercial banks consider deposits as a liability that they owe to their clients, settlement balances are a liability the Bank of Canada owes to the commercial banks. We pay interest on them at our deposit rate, which moves one-for-one with our policy interest rate. So to recap, when we perform our QE operations, we buy government bonds from financial institutions and issue liabilities—in the form of settlement balances—to pay for them. It’s important to note here that settlement balances are a normal part of central banking operations. Being able to issue settlement balances is a privilege that only central banks -5have. We use this ability carefully to fulfill our mandate of promoting the economic and financial welfare of Canada and Canadians. Questions about quantitative easing I’ll be the first to admit that the mechanics of quantitative easing can be hard to wrap your head around. So I’d like to turn my attention now to the questions I raised earlier—what the public and some officials have asked us to explain about QE. The first is the impression that we’re activating the printing press and issuing bank notes to buy government bonds. Are we printing cash? Like a lot of central banks, the Bank of Canada moved away many years ago from setting the amount of cash in the economy. Instead, we set the overnight interest rate and let households and businesses decide how much cash they need to conduct their transactions. When we conduct QE, as I have explained, we buy government bonds and pay for them by issuing a variable interest rate liability in the form of settlement balances. Just like anyone else who takes on debt, we compensate the holders by paying interest on these balances. And as our policy rate changes, so does the interest rate we pay on settlement balances. When we carry out QE, our balance sheet expands, but the number of bank notes in circulation does not. Is the Bank financing the federal government’s debt? Another important point is that QE does not release the government from its liabilities. We are not financing government spending at no cost, nor are we making the government’s debt disappear. There is a big difference between financing the government and influencing the cost of government financing. Through QE, the Bank of Canada is doing the latter—we are lowering the cost of borrowing for the government. But most importantly, we are lowering the cost of borrowing for everyone in the economy. To put it simply: we are not providing a free lunch for the government. The government will have to repay the bonds that we purchase through our QE program when they reach maturity. I should note that QE operations may result in a profit or loss for the Bank because of the difference in interest rates between our borrowing cost and the return on government bonds. Any profit or loss arising from our QE operations is passed on to the government, as part of our regular remittance. However, it’s important to state that increasing revenue is not the primary goal of these operations. The sole purpose of QE is to reduce the cost of borrowing for everyone in Canada, so we can help people get back to work and achieve our inflation target. Will QE cause high inflation? So let’s move on now to my third and final point of clarification. Since we started QE, I’ve heard and read a lot about the risk of causing excessive inflation. It is true that QE -6is designed to increase our current low level of inflation. That’s the whole point—to get us back near our 2 percent target. But rest assured we will not overuse QE and overshoot our 1 to 3 percent target range for inflation. The exit strategy for our QE program is tied to our inflation goals. We will pursue quantitative easing until our economic recovery is well underway. At that point we will have three different options. Once the amount of purchases has been reduced, the first option would be to stabilize the level of assets on our balance sheet by reinvesting any proceeds from maturing assets into new ones. This would maintain—but not increase—the level of stimulus. The second option would be to allow maturing assets to roll off the balance sheet and not reinvest the proceeds. The third option would be to actively sell the assets, thus quickly reducing our balance sheet. This option would be the most aggressive for reducing the level of stimulus. Several central banks that used QE during the global financial crisis focused on the first two options, in a careful sequence. Our choice between the different options would depend on our outlook for the evolution of inflation. How we’ve done so far The good news is that our efforts in the face of COVID-19 have had their intended effect. Financial markets are functioning much better than they were when we began our policy actions in March. Our balance sheet has been stable since July, largely due to reduced use of certain programs (Chart 2). Chart 2: The Bank of Canada’s balance sheet size has stabilized Bank of Canada total assets, weekly data Can$ billlions Jan Feb Mar Apr May Securities purchased under resale agreements Treasury bills All other assets Source: Bank of Canada Last observation: October 21, 2020 Jun Jul Aug Sep Government of Canada bonds Bankers’ acceptances Oct -7And our bond purchases have recently been recalibrated. We have adjusted our QE program to focus its impact on longer-term interest rates that matter for Canadians. We are buying fewer bonds at shorter maturities and more at longer maturities, where the benefit for Canadian households and business is greater. For example, when we buy more five-year bonds, this lowers the five-year lending rates on loans for households and businesses. Since this recalibration will increase the impact of each dollar spent in our QE program, we recently reduced our minimum weekly purchases from $5 billion to $4 billion. All of this allows us to be more efficient with our balance sheet, while continuing to provide at least as much monetary stimulus. Yesterday’s decision Let me conclude by spending a few minutes to provide some context for and insight into our policy decision yesterday. We decided to maintain the level of the policy interest rate at 25 basis points and continue asset purchases at a minimum of $4 billion weekly in our QE program. Foremost on our minds heading into the decision were recent developments across a few dimensions—how things have transpired to date, how things look in the near term and how things are shaping up further out. Let me briefly discuss each in turn. Looking back on developments to date, last week’s publication of Canada’s National Accounts for the third quarter of 2020 confirmed our expectation that a sharp rebound would take place as the economy reopened, following the precipitous decline in activity in the second quarter. Indeed, the economy grew rapidly, at close to 9 percent in the third quarter, just a bit below the 10 percent growth we had expected in our October Monetary Policy Report (MPR). The overall level of economic activity remains largely on track with our expectations, reflecting some historical revisions to gross domestic product and a little more momentum heading into the fourth quarter than we anticipated in October. It’s also worth noting that stronger global demand is pushing up prices for most commodities, including oil. A second aspect of our view was that this sharp rebound would give way to a longer, slower phase of the economic recovery. We’ve called this the recuperation phase. And indeed, more recent data suggest this part of our view is also unfolding largely as expected. The rising incidence of COVID-19 cases across the country and the tightening of restrictions on activity in response are exacerbating this dynamic. The second wave is clearly underway, here in Canada and globally. This will weigh on economic activity in the first quarter of 2021 and represents an important downside risk further out, if the situation becomes much worse. As we noted in yesterday’s decision, the federal government’s recently announced measures should help maintain household and business incomes during this second wave of the pandemic and support the recovery. -8Looking further out, the picture is more reassuring—recent positive news on vaccines represents an upside risk to the outlook, although uncertainty remains around how they will be rolled out, in Canada and globally. So that sets the scene. Going forward, both downside and upside risks to inflation are in play. For the Bank, that means being prepared to respond in either direction. Thankfully, we have the tools to do so. Should things take a more persistent turn for the worse, we have a range of options at our disposal to provide additional monetary stimulus. This could include increasing the stimulus power of our QE program, or it could involve targeting specific points in the yield curve, otherwise known as yield-curve control. It could also include reassessing the effective lower bound, which would allow for the possibility of a lower—but still positive—policy rate. In theory, negative interest rates remain in the Bank’s tool kit. But we’ve been clear that, barring a dramatically different set of circumstances, we don’t think negative rates would be productive in a Canadian context. What about options for responding to the upside? The faster people get vaccinated and more people get back to work in contact-sensitive sectors, the more quickly the recovery could unfold. Such an outcome would be welcome news. In that context, we may need to re-examine the amount of stimulus needed to achieve our inflation target. Earlier in my speech, I illustrated how we could withdraw stimulus from our QE program when the time comes. What we do know today is that Canada’s economic recovery will continue to require extraordinary monetary policy support. We have been clear that we will hold our policy rate at its effective lower bound until economic slack is absorbed, so that the 2 percent inflation target is sustainably achieved. As of our October MPR, that doesn’t happen until into 2023. We have not yet done a full analysis of all new information to shift that assessment. To reinforce our commitment and keep interest rates low across the yield curve, the Bank will continue the QE program until the recovery is well underway and will adjust it as required to help bring inflation back to target on a sustainable basis. Whatever the outcome, the Bank remains committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.
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Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, to the Greater Vancouver Board of Trade, Vancouver, British Columbia, 15 December 2020.
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Remarks by Tiff Macklem Governor of the Bank of Canada Greater Vancouver Board of Trade December 15, 2020 Vancouver, British Columbia (via Webcast) Trading for a sustainable recovery Introduction The year is coming to an end, and not a moment too soon. I’m sure most of us can’t wait to turn the page on 2020 and COVID-19. The pandemic has touched everyone, and the hardship has been severe for many. Some of you have lost loved ones. Others have lost jobs or businesses. And we all miss our family and friends, especially at this time of year. For months, we’ve wondered when we can get back to something approaching normal. I wish I could be in Vancouver delivering this speech in person and hearing about your concerns directly. Unfortunately, the time for face-to-face meetings has not yet come. But we can be together virtually, and I thank you for the invitation to speak with you today. The recent positive news on vaccines provides some reassurance that more normal activities can resume sometime later next year. However, the path from here to there looks difficult. A second wave of COVID-19 is sweeping across much of the country, leading to renewed restrictions. These will weigh on economic growth early next year and increase the strain on Canadian families and businesses. I don’t want to downplay these difficulties. But today, I want to look beyond this second wave and focus on a critical piece of our economic recovery—trade. So far, household spending has led the way. But for the economy to fully recover, it needs to be firing on more than one cylinder. To be sustainable, the recovery must broaden to include exports and, with this, business investment. Because we all need to lift our spirits as we head into the holiday season, I want to end the year with some cautious optimism. My message is that exports and business investment could bounce back from this recession more quickly than they did after the global financial crisis. But for this to happen, we all have some work to do. Allow me to start by looking back a decade to the recovery from the global financial crisis to compare how trade was evolving then with how it is evolving I would like to thank Patrick Alexander, Calista Cheung, Daniel de Munnik, Lena Suchanek and Ben Tomlin for their help in preparing this speech. Not for publication before December 15, 2020 14:30 Eastern Time -2now. I’ll show you what’s at stake with a robust export recovery. And I’ll close with some thoughts on how we can improve the odds of bringing this about. Comparing crises The global financial crisis pummelled the world economy back in 2008 and 2009. But Canada fared relatively well because of our strong financial system. Our recession was shorter and shallower than in most other economies. But our exports were hit hard—indeed, harder than most. That’s because of our close ties with the United States, which was the epicentre of the crisis. While global exports fell by less than 20 percent, Canadian exports fell by close to 30 percent. As is usually the case in recessions, demand for goods was particularly affected. Canada swung from having a large trade surplus in goods to a small deficit. (Chart 1). Chart 1: Canada's trade balance has been negative since the global financial crisis (Quarterly data, seasonally adjusted annual rate) Can$ billions -20 -40 -60 -80 Goods Source: Statistics Canada Services Total trade Last observation: 2020Q3 Canadian exports began to recover immediately after the crisis, but the rebound stalled. Weak foreign demand, particularly from the United States, was holding exports back. But that wasn’t the whole story. Bank of Canada researchers spent a lot of time dissecting these disappointing exports and zeroed in on two fundamental issues: geography and competitiveness. Two-thirds of Canada’s underperformance was blamed on geography—who we trade with. Canadian export markets were concentrated in mature economies with relatively slow growth, such as the United States, rather than faster-growing emerging-market economies, largely in Asia. The remainder of this poor performance was tied to a lack of competitiveness: unit labour costs in Canada were higher than elsewhere because of slow productivity growth and -3the impact of a stronger currency. Canada’s regulatory regime and investment climate were also cited as impediments.1 Now let’s look at how this past experience compares with today. While the period leading up to the global financial crisis was positive for trade, the period before the pandemic was anything but. Trade disputes arose between the United States and several other economies, including Canada, the European Union and particularly China. These disputes led to escalating tariffs and pervasive uncertainty about global policy. Bank researchers estimated that these factors combined would reduce global output by more than 1 percent—that’s more than $1 trillion—by the end of 2021.2 In this environment, it’s no wonder companies were reluctant to invest to expand their export capacity. Another difference between these crises is that, this time, trade in services has been affected much more than trade in goods (Chart 2). The impact on services was barely visible during the global financial crisis, whereas services fell along with goods in 2020. And overall, services haven’t recovered, even as goods have rebounded. Chart 2: Canadian exports: global financial crisis compared with COVID-19 pandemic (Nominal data, Seasonally adjusted annual rate, Index: start date = 100) Index t -2 t -1 t t +1 t +2 t +3 t +4 t +5 t +6 t +7 t +8 Start date (t) +/- number of quarters Goods—GFC Source: Statistics Canada Goods—COVID-19 Services—GFC Services—COVID-19 Start dates: global financial crisis (GFC), 2008Q3; COVID-19 pandemic, 2020Q1 Last observation: 2020Q3 Consider international tourism exports, which are vital to British Columbia. Tourism has basically come to a full stop. Canadian education exports have also been hit by the pandemic. When a foreign student comes to Canada to study, the tuition counts as an export of education services. Before the pandemic, this was 1 D. de Munnik, J. Jacob and W. Sze, “The Evolution of Canada’s Global Export Market Share,” Bank of Canada Staff Working Paper No. 2012-31 (October 2012). See also T. Macklem, “Regearing our Economic Growth” (speech to the W. Edmund Clark Distinguished Lecture, Queen’s University, Kingston, Ontario, January 10, 2013). 2 Bank of Canada Monetary Policy Report, January 2020, p. 2. -4a large and fast-growing activity. In 2019, educational services exports were almost $14 billion, an increase of 67 percent from 2015. The disproportionate impact of the pandemic on trade in services has significant implications for Canada. Services exports are only about a quarter of the size of goods exports. But services exports had been growing much more quickly than goods exports before the pandemic (Chart 3). Chart 3: Services exports outperformed goods exports before COVID-19 (Seasonally adjusted annual rate, Index: 2015Q1 = 100) Index Total goods and services Total goods Commercial services Travel services Source: Statistics Canada Total services Last observation: 2019Q4 While many services exporters will struggle until a vaccine is widely available, some goods exporters have been able to adapt safety protocols and bounce back quickly. Motor vehicle and parts output, for example, came to an almost complete stop in the spring. Since then, the sector has regained nearly all of the lost ground as factories adapted their value chains and production processes. The rapid rebound in goods exports is certainly encouraging. By October, the value of goods exports had recovered almost 90 percent of the loss seen in the spring. If struggling services exporters can hang on until a vaccine is widely available, Canada’s export performance could avoid the serial disappointment of the period that followed the global financial crisis and help cement a sustainable recovery. Of course, this is by no means guaranteed. The rebound in goods exports could fizzle out as companies finish rebuilding inventories, while prolonged hardship could force many services exporters to close their doors. And the underlying competitiveness challenges that have restrained export growth over the past decade have not gone away. More recently, the Canadian dollar has been appreciating, largely reflecting a broad-based depreciation of the US dollar. This is hurting the competitiveness of Canadian exporters in our largest market. Two scenarios for trade Where does the trade story go from here? Let’s imagine a couple of plausible scenarios: one pessimistic, one optimistic. In the pessimistic scenario, the global spread of COVID-19 fuels antiglobalization sentiment and a continued rise in protectionism. This is not farfetched. A recent Ipsos poll found significant support among Canadians for measures that would make the country less reliant on international trade. The same poll found much less support for measures that would help Canadian companies export more. This is troubling because international markets are essential for Canadian companies to achieve competitive scale in their operations and because Canada benefits from imports in many important ways. In the pessimistic scenario, we also fail to diversify our trade or improve our competitiveness. Rivalry and distrust between the United States and China thwart our efforts to develop export markets in Asia. Investment remains weak, and our productivity growth continues to lag. What’s more, new market access for our energy products doesn’t come on stream, holding back Canada’s ability to ship our number one export—oil. And without that market access, investment in cleaner oil-extraction technologies dries up. The bottom line is that exports fail to rebound, and trade does not become a reliable engine of growth. In the optimistic scenario, many of these same forces break the other way. The strong rebound in world trade we have seen to date continues, and the protectionist forces that have dominated in recent years begin to fade. Unprecedented international cooperation to develop new vaccines and supply them across borders proves to be a potent demonstration of the benefits of globalization. That success shifts public opinion. Governments start to knock down the tariff walls they had begun to build, and uncertainty lifts as governments recommit to a rules-based trading order. In the optimistic scenario, efforts to diversify markets for Canadian exports start to bear fruit. Canada’s productivity improves as a result of increased investment and the deployment of new technologies, which boosts the economy’s competitiveness. Canada and the new US administration cooperate on a North American approach to energy and climate change. Canada’s oil and gas sector benefits from access to markets. And we start to see an integrated continental approach to business opportunities from low-carbon growth. In this scenario, we see a resurgence of trade and business investment, which bolsters the economic recovery. The stakes are high. Using one of the Bank’s economic projection models, Bank economists estimated the impact of two scenarios that are less extreme than the ones I have just described.3 In their optimistic scenario, Canada’s trade balance 3 In the staff’s pessimistic scenario, estimates about the impact of tariffs and uncertainty on trade are maintained, while competitiveness losses, as proxied by the share of manufacturing in GDP, decline at the pace observed from 2010 to 2013. In the optimistic scenario, the negative judgment related to domestic trade uncertainty is removed, while the proxy for competitiveness increases gradually and returns to the level observed immediately following the global financial crisis. Staff -6would be more than $30 billion better by the end of 2024 than it would be otherwise. This would roughly eliminate our current trade deficit. But in their pessimistic scenario, exports would actually drift lower rather than recover, reducing incomes, while our current trade deficit would worsen by about 60 percent (Chart 4). Chart 4: Evolution of trade deficit in two scenarios Real trade deficit, difference from base case Can$ billions Peak impact: $53 billion -10 -20 -30 Upside Note: Assumes no policy rate reaction Downside Last data plotted: 2024Q4 In reality, the outcome will probably fall somewhere between the two extremes. Obviously, we all hope that real life turns out closer to the optimistic scenario than the pessimistic. But hope is not a strategy. We need to think strategically to increase the odds of a strong trade recovery. Markets for our products Business leaders and policy-makers each have important roles to play. They need to work together to leverage, broaden and deepen global markets for Canadian products. Thanks to the signing of the Canada-US-Mexico Agreement, the Comprehensive Economic and Trade Agreement with the European Union, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Canada already has some of the best market access in the world. Further, we have numerous bilateral trade deals in place. The business community and governments across Canada need to work together to leverage these market opportunities. The business community can capitalize on this market access by investing in people and in productive capacity. We know Canada has an incredibly diverse workforce—people have come from around the globe to live here, bringing their global connections and knowledge with them. And we’ve seen clear evidence researchers add an estimate of the impact of the reopening of the Oshawa auto plant in the optimistic scenario. -7that shifting populations can drive trade.4 Smart companies can leverage Canada’s workforce advantage to build global markets for their products. Companies can also look to global supply chains for growth opportunities. Supply chains are trending toward more regional networks around major global trade hubs. Global companies invest in the resilience of their supply chains through diversification of suppliers or production locations, and through digitalization and automation. Canadian companies need to seize these opportunities to be part of the solution. As policy-makers and business leaders, we have the responsibility to explain the importance of rules-based trade. We need to push for a renewal of the spirit of internationalism that served so many countries well for decades. And we need to make sure that the benefits of open trade are shared fairly within and across economies. With COVID-19 accelerating the digital economy, rules for digital trade and competition are more critical than ever. This also highlights the urgent need for a concerted, internationally coordinated effort to improve the ability to measure the digital economy. This is a priority for Statistics Canada, but much more work remains, and success will require cooperation across countries.5 Products for our markets As much as geographic diversification remains important, it’s not going to be easy or happen quickly. So, let’s look at this another way. We do need to develop new, fast-growing markets for our products, but we also need to develop new, fast-growing products for our markets. We have to grow and scale up production of high-value goods and services that we can export. The BC economy offers some leading examples of how this approach can work. On the services side, there are lots of success stories in Vancouver—where the world’s first commercial quantum computer was built and now the home of one of Canada’s most important technology hubs. Activity in these hubs is driving strong growth in exports that are as easy to ship to South Africa as they are to Seattle. Canadian exports of knowledge-intensive services such as research and development, computer and information services, and intellectual property grew by close to 12 percent over the past three years (Chart 5). It’s clear that digital services—including e-commerce, online education and application development—will be an important part of the future of trade. So will other BC specialties, such as video game production and animation studios. The pandemic is also accelerating growth in other technology services. Doctors and hospitals are finding new ways to use technology to provide health care 4 W. Steingress, “The Causal Impact of Migration on US Trade: Evidence from Political Refugees,” Canadian Journal of Economics 51, no. 4 (October 2018): 1312–1338. K. Head and J. Ries, “Immigration and Trade Creation: Econometric Evidence from Canada,” Canadian Journal of Economics 31, no. 1 (February 1998): 47–62. 5 Staff at the central banks of the G7 countries are working to raise awareness of the need for better measurement from a monetary policy perspective (see the 2019 report of the G7 Digitalization Working Group chaired by the Bank of Canada). -8virtually. With the explosion of remote office work, there are tremendous opportunities in areas such as cyber security, cloud computing and the development of virtual workplaces. Given the worldwide nature of the pandemic, advances in the digital economy can more easily become scalable, fast-growing exports. Chart 5: Knowledge-intensive sectors have been growing rapidly, positively contributing to Canada's trade balance Can$ billions Audio-visual services Other business services Knowledge-intensive services (Research and development, intellectual property, computer and information) -1 Technical services (architectural, engineering, etc.) Management and advertisement services -2 -3 Insurance and finance -4 -5 -10 Source: Statistics Canada -5 % Average nominal growth (2016–19) Note: Bubble size corresponds to scale of exports in billions of dollars. Bubble colour indicates positive if red, negative if blue. We’ve also seen lots of BC companies innovating by applying new technology in traditional goods sectors. Think forestry. We know the industry is under pressure from long-term supply constraints. But companies are adapting. Instead of wasting bark, wood chips and sawdust, companies are turning these into bioenergy. Canada is now the world’s second-largest exporter of wood pellets— an attractive fuel replacement for coal in power plants. The mass timber industry provides another example. The 18-storey Brock Commons Tallwood House on -9the University of British Columbia’s campus, which uses structural wood to replace most of the steel and cement, is a shining example of how Canadian innovation and know-how can create new high-value and sustainable products from our natural resources. You can find similar examples across other sectors such as mining and agriculture. Finally, I want to mention another opportunity that is also a strength for British Columbia—renewable energy and other green technologies. This includes clean energy production, goods such as solar panels, and services such as design and construction. Vancouver is home to one-quarter of Canada’s clean technology companies, with revenues of about $3.5 billion last year.6 The export potential of green technology is obvious, given global concerns about climate change. Winning in global markets That brings me to my final topic, which is Canada’s ability to compete and win in global markets. We won’t be able to fully capitalize on our opportunities unless we take steps to improve our productivity and competitiveness. Businesses have the leading role to play here. Investment in productivityenhancing machinery and equipment is vital. So is a commitment to research and development and to constantly train and re-skill employees. Several factors contribute to business investment decisions. But right now, the Bank of Canada has given forward guidance that borrowing costs are going to be low for a long while, and there’s light at the end of the tunnel as vaccines roll out. This seems an opportune time for companies to look at how they judge the rate of return on potential investments—the so-called hurdle rate. Taking a longerterm approach to capital investment could unlock a myriad of viable growth opportunities. Policy-makers, for their part, can help by removing barriers to business investment and impediments to growth of smaller firms. Let me mention three areas of focus. First is the ongoing need to remove obstacles to interprovincial trade. This comes up regularly in the Bank’s conversations with business leaders. Over the past nine months, the provinces and the federal government have demonstrated tremendous cooperation in dealing with the pandemic. Think what we could achieve if that same spirit of cooperation was applied to removing barriers to the movement of goods, services and professionals across provincial borders. A second area of focus is infrastructure. Exporters will remain reluctant to invest if the infrastructure to get their products to market doesn’t exist. Canada has made some progress here. The LNG plant being built in Kitimat is one notable example that will help our energy exports in the future. However, more needs to be done. I met with leaders of a number of logistics companies last month. They shared their concerns about bottlenecks, particularly at ports. Fast-growing exports need reliable transportation infrastructure, including efficient, highcapacity ports. And I know that both the Port of Vancouver and Port of Prince 6 See KPMG, British Columbia Cleantech: 2019 Status Report (February 2020). - 10 Rupert are working on major capacity expansions. This is encouraging. Boosting our export capacity also requires building the information and data infrastructure needed to compete in a digital world. A third area of focus is people. Our biggest asset is a well-educated and diverse workforce. For the past four years, the policies and attitudes of the US administration helped make Canada look more attractive to students and workers, giving us an advantage. With the incoming US administration, Canadian schools and companies may have to fight harder to attract and retain talent. But being a welcoming country remains an important advantage, and immigration creates economic capacity. We need to focus on ensuring that Canada maintains a well-educated, multinational workforce to attract foreign investment, leading to increased exports. Conclusion It’s time for me to conclude. The economic recovery from the pandemic is at a very difficult stage. Near term, rising COVID-19 infections will dampen growth and could even deepen our economic hole. Uncertainty is elevated, and the recovery is going to be long and choppy. Nevertheless, there is room for cautious optimism that international trade will recover more quickly from the pandemic than it did from the global financial crisis, and Canadian businesses need to be ready. Since the initial shutdowns last spring, trade has bounced back faster than many economists had predicted. Recent international surveys suggest executives expect trade to be strong in 2021.7 And the news of effective new vaccines puts a more certain timeline on the resurgence of global demand. There is no single path to stronger exports, and as business leaders, you need to decide on the best strategies to move your company forward. These include investing in new markets and products and improving your competitive position. As a country, we need to leverage the broad trade access we have and work with like-minded countries to foster a renewed spirit of open, rules-based trade that works for the 21st century. We also need to remove barriers to investment and other obstacles that keep Canada punching below its weight in global markets. Think about the opportunities and imagine the possibilities. Canada has dynamic business leaders with good ideas, and Canadian businesses have responded to the pandemic with ingenuity. We also have a diverse, well-educated workforce and significant global market access. The Bank of Canada has pledged to support the investment climate by keeping borrowing costs low until economic slack is gone. Together, we can secure a resurgence in exports, broaden the recovery and put the economy on a sound, sustainable path. 7 HSBC, Navigator 2020: Now, Next and How for Business (2020).
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Opening Statement by Mr Tiff Macklem, Governor of the Bank of Canada, Ottawa, Ontario, 20 January 2021.
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Tiff Macklem: Monetary policy report press conference Opening Statement by Mr Tiff Macklem, Governor of the Bank of Canada, Ottawa, Ontario, 20 January 2021. * * * Good morning. Thank you for joining me to discuss today’s policy announcement and the Bank’s Monetary Policy Report (MPR). Our message today is threefold. First, the current surge of COVID-19 is a serious setback. With elevated infection rates and stricter containment measures in many parts of the country, households and businesses are facing renewed strains. The economy is slowing, and highcontact activities are once again being hit hardest. Second, with effective vaccines now rolling out, the prospects for a strong, sustained recovery through the second half of this year have improved in Canada and across most advanced economies. And third, the Bank of Canada will continue to support Canadians and the Canadian economy through these difficult times. Before turning to your questions, let me say a few words about the Governing Council’s policy discussions. We reviewed recent economic data. They indicate the Canadian economy had considerable momentum through to about the middle of the fourth quarter of 2020, and extraordinary fiscal and monetary policies have been working as intended. In today’s MPR, we estimate fourth-quarter growth at almost 5 percent, which is quite a bit stronger than we projected back in October. But with higher infection rates and tighter restrictions, this positive momentum has been broken. Employment declined in December for the first time since April, and consumer spending looks to have pulled back. We are now projecting the economy to shrink by roughly 2½ percent in the first quarter of 2021. There is a risk that the severity and duration of the containment measures could be extended further, and the first-quarter decline could be larger. Once again, the burden of this renewed weakness is falling disproportionately on workers and businesses in high-contact industries, such as restaurants, hotels and travel services. In the near term, the highly uneven impacts of the pandemic will likely increase. As of December, employment of low-wage workers was still close to 20 percent below its pre-pandemic level, while employment of other workers had more than completely recovered. And, we know that the closing of in-person schooling in some provinces is making life more difficult for many working parents, particularly women. But these containment measures are temporary. When the current restrictions are eased, we can expect a sharp bounce back in economic activity. And, unlike the first lockdown in March, we now have a clearer sense of the way forward, thanks to effective vaccines that have arrived sooner than we had anticipated. As these vaccines are distributed, they will save lives and livelihoods. Governing Council spent a lot of time discussing our expectations for growth once we get past the current surge in the virus. We recognized that, while the arrival of vaccines has reduced uncertainty from exceptional levels, uncertainty remains elevated. In particular, the timing and strength of the economic recovery will depend importantly on the evolution of the virus and the rollout of vaccines. 1/2 BIS central bankers' speeches Based on the current vaccine rollout plans, as we move into the second half of this year and more Canadians are vaccinated, we expect to see sustained strength in consumption, with services picking up from very depressed levels. This should support job creation, particularly for workers who have been most affected by the pandemic. And as we move toward broad immunity, we can expect uncertainty about the pandemic to fade and business confidence to improve. This will lead to stronger business investment and exports, consistent with a more broad-based and sustainable recovery. All this will translate into strong economic growth in the second half of this year and first half of 2022. Expressed in annual average terms, we project an expansion of 4 percent this year and almost 5 percent in 2022, easing to about 2½ percent in 2023. But even with this strong growth, Governing Council expects the recovery will be protracted, reflecting how far the economy still has to climb back to reach its full potential. In the MPR projection, economic slack is not fully absorbed until into 2023. Let me say a few words about the outlook for inflation. In recent months, CPI inflation has increased to near the bottom of the Bank’s 1 to 3 percent target range. We now project inflation to return to around 2 percent in the first half of the year, but this is expected to be temporary. The anticipated increase in inflation mainly reflects the effects of the sharp declines in gasoline prices at the onset of the pandemic. As those base-year effects fade, inflation will fall again, pulled down by the significant excess supply in the economy. As the economy absorbs this excess supply, we expect inflation to move up gradually and return sustainably to the 2 percent target in 2023. In sum, there is clear reason to be more optimistic about the direction of the economy over medium term. But we are not there yet. The resurgence in COVID-19 cases weighs heavily on the near-term economic outlook. And this underlines the ongoing need for extraordinary fiscal and monetary policies. Governing Council spent a good bit of time discussing the amount of monetary stimulus the economy needs. In view of the near-term weakness and the protracted nature of the recovery, we concluded that the exceptional degree of monetary stimulus currently in place remains appropriate. We agreed that if the economy turns out to be substantially weaker than we are projecting— leading to more disinflationary pressures—then we have options to add even more stimulus. And we are prepared to use these options as needed. We also agreed that it is too early to consider slowing the pace of our purchases of Government of Canada bonds. However, if the economy and inflation play out broadly in line or stronger than we projected, then the amount of quantitative easing (QE) stimulus needed will diminish over time. In view of these conclusions, the Governing Council reiterated our commitment to hold the policy interest rate at its effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the projection we released today, that does not happen until into 2023. To reinforce this commitment and keep borrowing costs low for consumers and businesses, Governing Council decided to maintain our program of government bond purchases at the current pace of at least $4 billion per week. We will continue the QE program until the recovery is well underway. And as we gain confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required. We remain committed to providing the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective. Let me stop there, and turn to you for questions. 2/2 BIS central bankers' speeches
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Remarks (delivered virtually) by Mr Timothy Lane, Deputy Governor of the Bank of Canada, at the Institute for Data Valorisation, Montreal, Quebec, 10 February 2021.
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Remarks by Timothy Lane Deputy Governor Institute for Data Valorization February 10, 2021 Montréal, QC Payments innovation beyond the pandemic Introduction Good morning, and thank you for hosting me today. I’m sure many of you share my sentiments about these virtual events—that we would much rather be together in person, and yet we are grateful for the technology that allows us to gather online. The need to switch to this digital platform is, of course, just one small example of the changes brought on by the global pandemic. COVID-19 has claimed the lives of far too many—in Canada, we have lost more than 20,000 people. The virus has had a devastating impact on households and businesses across the country. Almost overnight, the Canadian economy suffered its worst setback since the Great Depression. One major impact of the pandemic is certainly familiar to all of us by now: the digitalization of our personal and professional lives has accelerated. In my remarks today, I’ll focus on how these developments have affected the world of payments. I’m referring to changes in the way Canadian consumers and businesses pay for goods, services and financial assets. I’ll begin by talking briefly about the economic consequences of the pandemic. Then I’ll go on to discuss the implications for three main aspects of payments. The first is the concept of a central bank digital currency—a “digital loonie,” as it were. For several years, the Bank of Canada has been analyzing which circumstances might lead Canada to decide to issue a digital currency. The pandemic may bring us to a decision point sooner than we had anticipated. Next, I’d like to look at a major program of payment system modernization underway in Canada. Consumers and businesses will see the benefits of this I would like to thank Scott Hendry, Darcey McVanel, Christopher Reid and Francisco Rivadeneyra for their help in preparing this speech. Not f or publication before February 10, 2021 11:30 am Eastern Time -2modernization rolling out this year and next. The pandemic has underscored the importance of expanding the reach of real-time payments. Finally, I will address the issue of cross-border payments, which are often slow, expensive and vulnerable to fraud. The Bank has collaborated with international partners on a roadmap to address the pain points in cross-border payments. We are fully committed to working with the public and private sectors to make any necessary changes in Canada to support this. COVID-19 and the digital economy The digitalization of the economy was well underway before COVID-19 hit, but the changes brought on by the pandemic have been rapid and far-reaching. As a society, we had to quickly implement the virtual workplaces we had largely only been imagining. Nearly one-third of Canadians are mostly working from home,1 including me—I have been in my office only eight times since last March. In addition, many students continue to learn virtually. COVID-19 has also changed how we shop. A survey of Canadian retailers shows that e-commerce has nearly doubled from pre-pandemic levels.2 Businesses are responding to the pandemic by incorporating new technologies into their operations. In our most recent Business Outlook Survey, nearly twothirds of participating firms reported that they are making some kind of digital investment.3 Expanding their business online was commonly cited as the reason for these investments—on both the operations and client-facing sides. Among these developments is a shift toward the increasing use of digital payments. For example, a November 2020 survey found that two-thirds of small businesses now accept payments online—and half of them started doing so only recently.4 Even when Canadians pay for goods in person, contactless options appear to be gaining traction. Interac reports that the volume of Interac Flash transactions grew by two-thirds in July 2020 compared with April.5 Consumer surveys also report that contactless payments have increased.6 The Bank of Canada has been carefully watching these trends. We are particularly interested in how the pandemic has changed the way that Canadians purchase goods and services. And we are keenly aware of the need to seize the opportunities that lie before us to give Canadians even better, cheaper and faster payment methods. Statistics Canada, “Labour Force Survey, December 2020,” The Daily (December 2020). Statistics Canada, “Monthly Retail Trade Survey,” (October 2020). Bank of Canada, Business Outlook Survey—Winter 2020–21 (January 2021). PayPal Canada, Business of Change—PayPal Canada Small Business Study (November 2020). Interac, “Interac Debit data: Signs of COVID-19 recovery,” press release. H. Chen, W. Engert, K. P. Huynh, G. Nicholls, M. Nicholson and J. Zhu, “Cash and COVID-19: The Impact of the Pandemic on the Demand for and Use of Cash,” Bank of Canada Staff Discussion Paper No. 2020-6 (July 2020). Cash: physical and digital Let’s start with Canadian bank notes. As we have all embraced technology and its many innovations, one thing that hasn’t changed as much is cash. It’s true that the Bank has updated bank notes in new and exciting ways. We’ve incorporated state-of-the-art security features to combat counterfeiting. We now make bank notes using polymer instead of paper. And we’ve made a concerted effort to ensure the images and portrait subjects on bank notes reflect Canada’s unique and changing identity. But the basic nature of bank notes has not changed—they are still physical objects. However, for the past decade or so, the Bank has been considering these bank notes, and we’ve been asking ourselves: could Canada and Canadians benefit from a digital form of cash? In a speech in Montréal a year ago, I gave our preliminary view: we did not see a need for a central bank digital currency at that time, but we could imagine scenarios that could make a central bank digital currency beneficial in Canada. I concluded that we would move forward to develop such a digital currency as a contingency plan, given how quickly the world is changing and the time required to develop a viable product.7 A year later, our view remains unchanged: a digital currency is by no means a foregone conclusion. That said, the world has been changing even faster than we expected. In fact, just two weeks after I spoke, the first lockdown was imposed, which accelerated the evolution of the digital economy. And so our work to prepare for the day when Canada might want to launch a digital loonie—backed by the Bank—has also accelerated. We are not alone. In a recent survey, almost 60 percent of central banks reported the possibility that they will issue a central bank digital currency within six years. This is up from less than 40 percent only a year ago.8 One scenario we have been watching is whether a sharp decline in the acceptance of cash reaches a tipping point in Canada. We’ve already seen that as societies and economies modernize, cash has been losing ground to digital methods of payment—around the world and here at home.9 Since COVID-19 hit, we’ve seen a growing hesitancy in Canada to use cash. Although Canadians are holding more cash than ever, cash may not currently be circulating as much. In recent Bank of Canada surveys, consumers report some T. Lane, “Money and Payments in the Digital Age” (speech to the CFA Montréal FinTech RDV 2020, Montréal, Quebec, February 25, 2020). C. Boar, H. Holden and A. Wadsworth, “Impending Arrival—A Sequel to the Survey on Central Bank Digital Currency,” Bank for International Settlements Working Paper No. 107 (January 2020). K. Huynh, “How Canadians Pay for Things,” Bank of Canada The Economy, Plain and Simple (October 2019). -4merchant preference for contactless payments, and some report experiencing merchants’ refusal of cash due to fears of virus transmission.10 Of course, it’s too early to tell whether these trends will continue beyond the pandemic, but we are watching closely. The other scenario I raised in my speech last year is the increasing use of digital currencies created by the private sector, including cryptocurrencies and so-called stablecoins. While these products have existed for several years, some could see a boost from the acceleration of digitalization in the midst of the pandemic. Even in this increasingly digital economy, though, cryptocurrencies such as bitcoin do not have a plausible claim to become the money of the future. They are deeply flawed as methods of payment—except for illicit transactions like money laundering, where anonymity trumps all other features—because they rely on costly verification methods and their purchasing power is wildly unstable. The recent spike in their prices looks less like a trend and more like a speculative mania—an atmosphere in which one high-profile tweet is enough to trigger a sudden jump in price. In contrast, widespread adoption of stablecoins for everyday transactions is possible, although none is near that point yet. Because in most cases they are partly or fully backed by safe assets, their purchasing power is designed to be more stable. But many issues need to be addressed before we can be confident that stablecoins can be used safely by the general public. The Financial Stability Board is examining these issues at the global level, and I am chairing the international working group that is taking this work forward. Here in Canada, we still have work to do to ensure that our regulatory framework covers these new products. Amid all of these developments, two fundamental questions need to be addressed: Are there benefits to issuing a digital form of money? And if yes, who should do so? In response to the first question, we don’t yet know whether many Canadians will actually want to use a stablecoin or any other kind of digital currency when they have alternatives available—cash, debit, credit and electronic transfer. Would the addition of a digital form of cash to the existing suite of digital payment methods meet a real demand and enhance the evolution of a competitive, vibrant digital economy? More work is clearly needed to identify the potential benefits to users, compared with other alternatives. And of course we also need to study potential risks. H. Chen, W. Engert, K. P. Huynh, G. Nicholls, M. Nicholson and J. Zhu, “Cash and COVID-19: The Impact of the Pandemic on the Demand for and Use of Cash,” Bank of Canada Staff Discussion Paper No. 2020-6 (July 2020). -5In response to the second question, if the public does want a digital cash-like currency, some good reasons illustrate why a central bank—a trusted public institution—should issue it. Currency is a core part of the Bank’s mandate, and the integrity of our currency is a public good that all Canadians benefit from. Only a central bank can guarantee complete safety and universal access, and with public interest—not profits—as the top priority. Let me spell out one aspect. It has been said that in the digital economy, data is the new oil. Many technology companies follow a business model in which they use their customers’ data to refine and expand the range of products and services they offer to the public . This, in turn, pulls more and more business onto their platform, which generates more data, and so on. If that business model were used as a foundation for the dominant method of payment in the economy, the issuer would gain control over an enormous range of data—bringing with it overwhelming market power.11 In effect, a technology company could become the gatekeeper of the entire economy, with concerning implications for privacy, competition and inclusion. Let’s compare this with a central bank digital currency. A central bank—with no commercial motivation to harvest data—is uniquely positioned to build in safeguards for privacy, while at the same time defending against criminal uses. Privacy is clearly important to Canadians, and it’s also in the public interest to protect some degree of privacy.12 Universal access would need to be another key feature of a central bank digital currency. That means ensuring that remote and marginalized communities— including but not limited to the underbanked and unbanked—are not left out of this new way to pay for goods and services. As part of our advancing work, the Bank has been researching and experimenting with different technologies. In addition, we recently engaged three university project teams to independently develop proposals for what a digital currency ecosystem could look like. Their reports will be released tomorrow. This blue-sky thinking will help inform our research going forward. We are also carefully considering what the business model for a Canadian central bank digital currency might look like: What role would the private sector play in its development, distribution and transfer? How would this product interface with Canada’s core payments systems that transfer funds among financial institutions to settle both retail and large-scale payments? J. Chiu and T. Koeppl, “Payments and the DNA of Big Tech.” Presentation at The Future of Money and Payments: Implications for Central Banking, Bank of Canada Annual Economic Conf erence, November 5, 2020. R. J. Garratt and M. R. C. Van Oordt, “Privacy as a Public Good: A Case for Electronic Cash,” Bank of Canada Staff Discussion Paper No. 2019-24 (July 2019). Modernizing our core payments systems Long before the pandemic hit, efforts to modernize Canada’s core payments systems had already begun. This work is important, and with the rapid expansion of the digital economy accelerated by the pandemic, we can now see the benefits more clearly. Led by Payments Canada, several key players in the payments ecosystem— such as Interac, commercial banks and other stakeholders—have been working to bring these payments systems fully into the modern digital age. The Bank of Canada is heavily involved as a central bank, a regulator and, in some cases, a participant. Over the next year or so, these improvements will start to come online. This is important for Canadians because it will mean greater speed, convenience, competition and choice in how people pay for goods and services. Right now, the fastest and most immediate money transfers we see are e-Transfers. But the new Real-Time Rail system—which will go live in 2022—will provide real-time payments beyond what is already offered through e-Transfer. When this innovation is complete, we can imagine scenarios like these: businesses being able to pay part-time workers immediately upon completion of their shift; homebuyers putting down the deposit on their first home with a click of a button instead of physically taking a bank draft to their lawyer’s office; and governments being able to distribute emergency funds in a matter of seconds, directly into citizens’ bank accounts. The Bank is also helping to improve other core payments systems. This includes an interbank payment system called Lynx, which will replace the current Large Value Transfer System this autumn. Lynx’s up-to-date technology includes enhanced safeguards against cyber and other risks. Another system we’re looking to improve is the one that clears cheques and other low-value payments. Improvements here will further expand consumers’ choices for convenient digital payments. Two other important developments, which I will briefly describe, will complement these changes. The first is retail payments supervision. This past August, the Bank assumed oversight responsibility for the Interac e-Transfer system under our current mandate. And the Government of Canada has announced its intention to give the Bank of Canada further oversight authority for retail payment service providers— companies that aren’t traditional banks but specialize in processing payments for the public. By ensuring that risks are well managed, the Bank, through its new supervisory role, will support confidence in payment service providers and should further encourage competition and innovation in retail payments. The second development is open banking, which will remove the barriers for banking customers to safely and easily share their financial information if they choose to engage other service providers in managing their money and other assets. Open banking will help promote greater competition and choice by allowing consumers and businesses to more easily compare the products and services various financial institutions offer. -7Several countries have already introduced open banking, and the federal government has launched consultations on how to implement it in Canada. This is being done to ensure that innovations are balanced with data control and privacy considerations. We have come a long way, but more work remains. And this work takes on greater urgency as we find ourselves in an environment where the current system’s shortcomings could limit the ability of consumers and businesses to pursue the opportunities created by the digital economy. Thankfully, Canadians can look forward to significant improvements in the speed, convenience, efficiency and choice of digital payments in the near future. This is an important part of the Bank’s responsibility to promote safe, sound and efficient financial systems. Cross-border payments I’d like to turn now to the issue of cross-border payments, an area that has an obvious and pressing need for improvement. Sending money abroad has always been notoriously slow and expensive for individuals and businesses—so much so that it interferes with lives and livelihoods. Issues with cross-border payments affect millions of Canadians. This includes new Canadians who send money to family in their country of origin. It includes snowbirds who split their time between Canada and warmer climates—although not this winter, for the most part. And it includes many Canadian businesses that face unnecessary costs and delays in paying for supplies and services from abroad or in receiving payment for the things they sell outside the country. Beyond our borders, the issues are even more pressing for developing countries, where many individuals rely on family members abroad to send them money so they can afford basic necessities such as food, clothing and education. Many of these needs have become more acute with the uneven global impact of the pandemic. Put simply, the problems with sending money across borders create disadvantages that can prevent already impoverished people and countries from fully participating in the global economy. In fact, these issues have been used as an argument for the creation and use of cryptocurrencies and stablecoins. But there is plenty of room to improve crossborder payments without using these novel methods of payment, which would not by themselves fix the problems with cross-border payments. As part of an initiative endorsed by the G20 and coordinated by the Financial Stability Board, the Bank of Canada and other central banks and regulators have developed a roadmap to solve some of these problems. Our main goal is to support faster and cheaper cross-border payments that are more accessible and transparent. As I mentioned at the beginning of my speech today, we have identified numerous pain points in cross-border payments. Technological shortcomings certainly pose problems with different messaging standards in different countries. Anti-terrorism and anti–money laundering regulations—while crucial for our safety and security—can also slow the transfer of money, with multiple -8compliance checks. And of course, there are numerous time zones to consider. When you send money from Ottawa at noon all the way to Cambodia, the local payment system there isn’t open at midnight to process the funds. The G20 roadmap is extensive and lays out work that several different organizations will carry out. For our part, the Bank is working with partners internationally—most notably the Committee on Payments and Market Infrastructures at the Bank for International Settlements. But just as important, we’re also putting the pieces in place in Canada to support the coordinated domestic effort that will be necessary to identify and address the most pressing issues from a Canadian perspective. For all of these efforts to be successful, central banks and other authorities around the world who are working on this will need the cooperation of public and private sector partners in their own jurisdictions. Only then can we make lasting improvements to cross-border payments and ensure that people, businesses and nations around the world have the best opportunity to truly participate in the global economy. Conclusion Canadians may take our current payments ecosystem for granted because buying goods and services is already relatively simple. Long gone are the days when making a large impulse buy on a weekend was next to impossible because your bank wasn’t open for you to withdraw cash. But that doesn’t mean there aren’t opportunities to provide Canadians with greater choice in how they pay for goods and services. Digital payment methods are integral to a truly digital economy, and can open up endless possibilities for further digital innovation. And as we all struggle with the personal, professional and economic ramifications of the pandemic, it’s even more important that the Bank move forward with this work. The Bank will continue to explore the possibilities of a digital currency that would be an electronic version of the bank notes that Canadians trust and rely on. We will issue such a currency only if and when the time is right, with the support of Canadians and the federal government, and with the best evidence in hand. We can and will make our core payments systems more effective and efficient to help consumers and businesses exchange funds in real time. And we will push forward with work to make cross-border payments cheaper, easier and safer for people around the globe to send and receive money. Thank you again for having me, and I look forward to your questions.
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Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, to the Edmonton Chamber of Commerce and Calgary Chamber of Commerce, 23 February 2021.
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Remarks by Tiff Macklem Governor of the Bank of Canada Edmonton Chamber of Commerce and Calgary Chamber of Commerce February 23, 2021 Edmonton, Alberta Calgary, Alberta (via webcast) Canada’s labour market: rebound, recuperation and restructuring Introduction I’m very pleased for the opportunity to speak to you today—thank you for the invitation. As much as we are all getting used to these virtual events, I would greatly prefer to be with you in person to hear your perspectives and concerns directly. Your input is important to the Bank of Canada. We need to know what’s happening on the ground in Alberta and across the country. Fortunately, the Bank has a strong presence in the province. Two years ago, we opened our financial operations centre in downtown Calgary, which now employs close to 90 people. And since 1997, we have had staff in our regional offices who are eager to listen to local business leaders like you. Over the past year, this has become more critical than ever. COVID-19 has touched every Canadian in every corner of the country. The pandemic is, first and foremost, a human tragedy, taking the lives of more than 20,000 Canadians, and it’s not over. It has also led to an economic downturn unlike anything we’ve ever seen. Albertans have been especially hard hit, facing the double blow of lockdowns and low oil prices. We have already climbed a long way back from the very deep economic hole we were in last spring. And with Alberta and much of the rest of Canada emerging from the latest round of containment measures, we expect a solid rebound in the immediate months ahead. How much the economy can re-open and the strength of this rebound will depend on the path of the virus, including the new variants. But with vaccinations expected to ramp up, we can be more confident in sustained strong growth through the second half of the year and into next year. Nevertheless, it will be some time before we see a complete economic recovery. The Bank’s latest forecast doesn’t anticipate economic slack being fully absorbed until into 2023. COVID-19 has pummelled the service sectors that have been most affected. Moreover, we are not returning to the same economy we had before the pandemic. Even as it recovers, the economy is adapting to structural I would like to thank Dany Brouillette, Karyne Charbonneau, Erik Ens and Corinne Luu for their help in preparing this speech. Not for publication before February 23, 2021 12:30 Eastern Time -2changes, and some workers will need to shift to jobs in faster-growing sectors. This all points to an even more protracted recuperation period while the economic potential that was lost over the course of the pandemic is rebuilt. Today, I want to look at the economic recovery through the lens of the labour market. For Canadians and their families, few things are more important than a good job. A healthy labour market means more employment and higher incomes. It also means greater opportunities for people who have struggled to find work. For the Bank, a healthy labour market is central to achieving our mandated goal of low, stable and predictable inflation. Indeed, at its heart, inflation targeting is about achieving low inflation together with full employment because to sustainably achieve either, we need both. Without full employment, inflation will not stay close to its 2 percent target because the shortfall in jobs and incomes will pull inflation down. And without low inflation and well-anchored inflation expectations, we are doomed to repeat boom and bust cycles with large fluctuations in employment. Today, a healthy labour market remains a long way off. The economy is down more than 850,000 jobs since the start of the pandemic, with the losses concentrated among the most vulnerable: low-wage workers, who are disproportionately women and youth. In my remarks, I will discuss the prospects for a complete recovery in the labour market. I will start by reviewing the deep and disparate impacts of the pandemic on Canadian workers so far. I will then talk about what we can expect in the months ahead and how the pandemic has sped up the restructuring related to the forces of digitalization and automation. And I will conclude with a few words about what these forces mean for everyone—workers, educators, businesses and, of course, policy-makers. Together, we can manage these forces to the benefit of Canadians. A complete recovery is a shared recovery—shared by working women and men of all ages across Canada. Some ebb and flow in labour market conditions across regions is inevitable, but all regions need to share in the recovery. Historically, Alberta has attracted workers from other regions. Prosperity in the oil patch has created jobs and wealth that were spread across the country.1 Alberta remains a province with tremendous promise, blessed with an abundance of natural and human resources. Yours is among the most highly educated populations in Canada, with a great spirit of entrepreneurship. A healthy and diverse Albertan economy will be important as we work toward securing a complete recovery. Deep and disparate job losses At the start of 2020, Canada’s labour market was in quite good shape. Of course, we still had pockets of weakness, particularly in energy-intensive regions. But 1 D. A. Green, R. Morissette, B. M. Sand and I. Snoddy, “Economy-Wide Spillovers from Booms: Long-Distance Commuting and the Spread of Wage Effects,” Journal of Labor Economics 37, no. S2 (July 2019): 643–687. -3overall, we had largely undone the damage caused by the global financial crisis. The unemployment rate had fallen to near 40-year lows. Participation rates were increasing for all age groups. Wage growth was rising, and the quality of jobs was improving. When COVID-19 arrived in Canada, this all changed very suddenly. In just two months—March and April—roughly three million jobs disappeared. From February to May, the unemployment rate went from one of the lowest on record to one of the highest. If you add to the unemployed those Canadians who wanted a job but were not actively looking and those workers whose hours were cut by more than half, almost five million more Canadians did not have the work they wanted in April last year, compared with February. COVID-19 has affected everybody, but the impacts have been much more severe for some economic sectors and their workers. High-contact service industries—where physical distancing is either difficult or impossible—have been hammered. At the trough, output in sectors such as accommodation, food services, arts, entertainment and recreation had shrunk by more than 60 percent, while air transportation had fallen by more than 95 percent. Meanwhile, industries where physical distancing or remote work is possible— such as professional services, finance, and public administration—have been much better able to adapt. And, of course, essential workers in health care and public safety are working harder than ever, and we’re all tremendously grateful to them. These starkly different effects across sectors have led to very unequal consequences for workers. Because women and youth hold so many of the jobs in the hardest hit sectors, they have borne a disproportionate share of the job losses (Chart 1). For example, young people—those aged 15 to 24—hold about 40 percent of the jobs in the accommodation and food services sectors. That’s more than three times their share of the labour force. By April, youth employment had fallen by more than 30 percent. Chart 1: Women have seen greater losses in employment than men Change in employment by age and gender, percent, seasonally adjusted % -10 -20 -30 -40 15–24, men 15–24, women 25–54, men 25–54, women Change at trough (February 2020 to April 2020) January 2021 vs. February 2020 Change at trough (February 2020 to April 2020) January 2021 vs. February 2020 Sources: Statistics Canada and Bank of Canada calculations -4For families with young children, the closing of schools and daycares has also had a profound impact on the ability of parents to work. The burden of child care tends to fall disproportionately on women. From February to May, the participation rate of women in the labour force declined sharply. And for women who remained in the labour force, the unemployment rate rose from 5.4 percent to almost 14 percent. As the economy reopened in the spring, the plunge in employment reversed sharply. From May through November, the economy added almost 2.4 million jobs, recovering about 80 percent of its losses. The rebound also began to narrow some of the inequalities in the labour market. Women returned to the labour force, recovering much of the earlier decline in participation. Youth employment improved modestly, though young women, in particular, continue to face very challenging labour market conditions (Chart 2). Unfortunately, in recent months the second wave of the virus interrupted the jobs recovery. More than a quarter of a million jobs were lost in the past two months, with the pain again falling disproportionately on women and youth. Women also began dropping out of the labour market again, partly because in-person schooling was suspended in many regions. Another sign of the pandemic’s unequal impact is that job losses have been concentrated among those least able to afford them. Low-wage jobs have been severely affected by the pandemic (Chart 3). By comparison, employment outside of low-wage jobs fell more modestly at the start of the pandemic and recovered quickly, exceeding its pre-pandemic level by September. These jobs have also proven more resilient to the second wave of the virus, remaining relatively steady in recent months. This reflects the ability of large parts of the economy to adapt to the pandemic. In contrast, employment in low-wage jobs has drifted lower since the summer and is now more than 25 percent below its pre-pandemic level. Finally, as the pandemic has dragged on, we have also seen a sharp rise in the number of long-term unemployed people—those who have been out of work and actively looking for a job for longer than 26 weeks. More than half a million Canadians are now long-term unemployed—the highest in almost 30 years. This increase mostly reflects the people who lost their job early in the pandemic and have not yet returned to work. Once again, sectors such as accommodation and food services made an outsized contribution to the increase in long-term unemployment. Recuperation and restructuring Fortunately, the look forward is better than the look back, though challenges remain. With the tightest restrictions being lifted in most parts of the country, we can expect some bounceback in employment in the near term. And, as with the first reopening, we should also see some reversal of the pandemic’s uneven impact in the labour market. The difference coming out of this second wave is that vaccines now promise a more sustained recovery. Once Canada achieves widespread vaccination, high-contact service industries should be able to resume something approaching full operations, resulting in strong job growth. Further, it’s reasonable to expect that more working mothers will rejoin the labour force as schools and daycares reopen permanently. It will be important to support this recovery and facilitate this return to work—a theme I will expand on later. However, while we can expect to get back to more normal activities, we are not going back to the same economy we had before. The fourth industrial revolution—the restructuring caused by digitalization and automation—was already well underway before the pandemic. And COVID-19 has accelerated it. Like earlier technological advances, digitalization and automation will bring important economic benefits through higher productivity and, eventually, highwage jobs to many in the labour market. Companies will find ways to become -6more efficient and create new types of jobs using innovative technologies. We have seen this process play out repeatedly, driving progress here in Canada and around the world. But deploying new technology can displace existing jobs. Adjusting to these changes is disruptive, particularly for the people directly involved. And the process is even more painful if it happens quickly.2 COVID-19 has broadened and accelerated the incentives for businesses to restructure through automation and digitalization. Businesses are restructuring so they can deliver goods and services to their customers safely, so their employees can work remotely, and so they can build resilience and reduce costs. Let me highlight a few examples. We have seen a huge rise in e-commerce since the start of the pandemic—at the expense of bricks-and-mortar stores. In 2020, e-commerce grew a remarkable 69 percent. Retail sales as a whole were up about 4.5 percent in the year. While we can expect a return to in-store shopping as it becomes safe to do so, the pandemic has likely permanently advanced the trend toward e-commerce. This may make shopping more convenient, but it points to a risk that the economy may need significantly fewer in-store retail workers than it did before the pandemic. COVID-19 has also led to a massive increase in remote work. Statistics Canada reports that almost 5.5 million Canadians are now working remotely—that’s more than one-quarter of the labour force. Many employers and employees have also become a lot more flexible about work arrangements, and businesses everywhere are reconsidering the future of work.3 This will have implications for the amount and types of space companies need and the demand for transportation, food and other services in the downtown cores of major cities. At the same time, these forces may make it easier for more people to work. I don’t want to minimize the challenges that remote work can pose and the difficulties it has meant for some people. But many workers are delighted to save time and money by giving up a long daily commute. The possibility of remote work may also help some businesses and workers overcome the challenges posed by geography. For some jobs, remote work could improve matching between employers and employees, resulting in a stronger labour market and higher productivity. The trend toward digitalization suggests that the demand for workers with digital skills will continue to rise. Bank staff analyzed online job postings over the past year and found that postings for jobs related to the digital economy declined by 2 A. Georgieff and A. Milanez, “What Happened to Jobs at High Risk of Automation?” Organisation for Economic Co-operation and Development Social, Employment and Migration Working Paper No. 255 (January 2021). 3 Statistics Canada, “Canadian Survey on Business Conditions,” The Daily (November 2020). -7less and recovered by more than postings for other types of positions.4 By this measure, job postings for workers with digital skills are now well above prepandemic levels (Chart 4). At the same time, some of the jobs that have been lost during the pandemic will not return. And the workers who have already borne the brunt of the pandemic may be especially affected. Many low-wage jobs have a high potential of being automated. And some jobs that are disproportionally held by women and youth, such as retail salesperson and cashier, are also the kinds of jobs where the pandemic has accelerated structural change. We know that restructuring would be underway even without the pandemic. In the long run, the forces of digitalization and automation will be positive for the labour market, creating more flexibility and increasing productivity and wages. But in the near term, these forces will do little to help the people who have been most affected by the pandemic.5 And as long as some groups are struggling, we won’t secure a complete, shared economic recovery. Policy implications The stakes are high for everyone. We have seen a sharp rise in long-term unemployment. And people who go for a long time without a job can become discouraged and stop looking for work altogether. Economists call this labourmarket scarring. 4 Digital-oriented jobs are linked to the production of digital technologies and include software development, electrical engineering, information design and documentation, and information technology operations and helpdesk. 5 P. Baylis, P.-L. Beauregard, M. Connolly, N. Fortin, D. A. Green, P. Gutierrez Cubillos, S. Gyetvay, C. Haeck, T. L. Molnar, G. Simard-Duplain, H. E. Siu, M. teNyenhuis and C. Warman, “The Distribution of COVID-19 Related Risks,” National Bureau of Economic Research Working Paper No. 27881 (October 2020). -8Labour-market scarring can set people’s careers back by years and severely limit their lifetime earnings. Scarring also reduces the potential output of the economy, eroding its ability to grow without creating unwanted inflationary pressure. As a result, uneven outcomes that hurt some lead to poorer outcomes for everyone. We all have a shared responsibility to get Canadians back to work, to manage the forces of digitalization and automation, and to reduce the risks of labourmarket scarring. For workers, being in a position to take advantage of the opportunities is crucial. Not all the jobs in the most-affected sectors will return when the pandemic is over. So, it’s worth it for everyone to think about where their interests lie and the skills and training needed to pursue them. Digital skills will likely be in high demand. Technology is no longer a discrete sector, it’s in every sector. The Bank’s latest Business Outlook Survey indicates that companies are ramping up investments in digitalization. As the recovery progresses, the need for people with digital skills who can leverage these investments will likely intensify. The shift toward remote work can also represent an important opportunity for workers. Technology and increased flexibility can make it possible for people to fill jobs that were previously out of reach because of time or distance. For example, a person in Medicine Hat might not even think about a great position if it means moving to Mississauga or Moncton. But in certain sectors, remote work can make it possible to take that job. New digital technologies are transforming the education system itself, allowing learning to be delivered virtually. This could potentially broaden access to teaching and expand capacity, especially in high-demand areas such as data science, engineering, software development and business analytics. But the issue is far broader. Universities and colleges need to build in digital skills across all disciplines. Primary and secondary schools also need greater emphasis on digital literacy. This isn’t about training children for particular jobs. This is about preparing children for a digital future, where they will need to master digital skills in whatever career they choose. Companies also have a critical role to play in training. After all, employers are best placed to know what skills they are looking for in their employees. New virtual formats mean businesses can train many more workers at a lower cost. Some businesses are supplementing formal training with reverse-mentoring programs, where younger, digitally savvy workers are paired with older, more experienced workers. And businesses can reduce scarring by seeing the potential in the person behind the resumé, not the gaps in it. Many young workers who entered the labour force during the pandemic have struggled to find work through no fault of their own. Governments are playing a leading role in supporting workers. Emergency relief measures are replacing incomes from jobs lost, and wage subsidies are keeping businesses and workers connected. Strengthening the social safety net for families, particularly by increasing access to child care and reducing its cost, will -9help more women return to the labour force and remain there.6 As the labour market rebounds and restructures at the same time, reducing the risk of scarring points to the importance of active labour market policies—policies that improve matching and give more people better access to good jobs.7 The Bank is supporting spending in the economy and helping facilitate investments in workers and other forms of capital by keeping borrowing costs low for households and businesses. With a complete recovery still a long way off, monetary policy will need to provide stimulus for a considerable period. We have committed to keeping our policy interest rate at the effective lower bound until economic slack is absorbed so that our inflation target is sustainably achieved. And we have backed up this commitment with our program of large-scale government bond purchases. A complete recovery—a shared recovery—is in everyone’s interest. A shared recovery is self-reinforcing. It draws more workers into the labour force. It leads to more investment. It generates more potential growth. And it creates space for the economy to expand faster without building inflationary pressure. I began this speech by highlighting the health of Canada’s labour market before the pandemic. Unemployment had been around 40-year lows for a couple of years. Based on past economic cycles, we would have expected inflationary pressure to begin to rise. But inflation wasn’t threatening to take off. As the pandemic recedes and the recovery continues, we will keep that experience in mind. Monetary policy can continue to support demand in order to minimize scarring and bring as many people into the work force as possible. Conclusion It’s time for me to conclude. The COVID-19 pandemic has taken a tremendous toll here and around the world, in lives and livelihoods lost. And it has disproportionately affected highcontact service-sector jobs that many women and youth occupy. As Canada achieves widespread vaccinations, we expect the economy to rebound, and many of these jobs will return. But we are not going back to the same economy we had before. Some businesses and some jobs will not return either because of permanent changes in demand or the adoption of new technologies. So, we can expect a long adjustment process and a protracted recovery. The economy will need support for quite some time, and the Bank will continue to do its part. But monetary policy alone can’t bring about a complete recovery. We all have a role to play to ensure the recovery is broad-based and sustained, with the benefits shared widely. This highlights the importance of targeted public policies, 6 A. Barker, “Increasing Inclusiveness for Women, Youth and Seniors in Canada,” Organisation for Economic Co-operation and Development Economics Department Working Paper No. 1519 (December 2018). 7 S. Birinci, F. Karahan, Y. Mercan and K. See, “Labor Market Policies During an Epidemic,” Bank of Canada Staff Working Paper No. 2020-54 (December 2020). - 10 businesses that invest in workers, and an education system that develops the skills needed in the 21st century. I look forward to working together to bring about this shared recovery. Thank you.
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Remarks (delivered virtually) by Mr Lawrence Schembri, Deputy Governor of the Bank of Canada, to Restaurants Canada, Toronto, Ontario, 11 March 2021.
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Remarks by Lawrence Schembri Deputy Governor of the Bank of Canada Restaurants Canada March 11, 2021 Toronto, Ontario (via Webcast) COVID-19, savings and household spending Introduction Good afternoon. I am grateful for the opportunity to speak to Restaurants Canada once again. Your association represents more than 80,000 businesses across our country and in normal times would employ more than one million people. But we are not living in normal times. Everyone’s life has been disrupted by the COVID-19 pandemic. Unfortunately, some families have suffered heavily, experiencing severe illness and death. The economic impacts of the pandemic have been very uneven, and your industry has borne a heavy burden. Tens of thousands of jobs have been lost, thousands of restaurants have closed, and others are struggling to survive. Many restaurants have adapted with outdoor patios or pick-up and delivery. My family and I are doing our part to help keep our favourites in business and our friends who work there employed. But it’s not the same, is it? For my family and many others, restaurants hold a special place in our lives—that’s where we celebrate special occasions. They are where we make happy memories. So, we’re all looking forward to spring and the promise of better times ahead. At the Bank of Canada, we recognize that Canadians count on us, and we are doing our part to support Canadians. When the pandemic first struck, we responded swiftly and aggressively. We cut our policy interest rate by 1.5 percentage points, to a record low. We also injected sufficient liquidity into the financial system to ensure that Canadians could continue to borrow at low interest rates. To further support the recovery, we committed to holding the policy I would like to thank André Binette, Fares Bounajm, Antoine Poulin-Moore and Alex Proulx for their help in preparing this speech. Not for publication before March 11, 2021 1:30 pm Eastern Time -2rate at 0.25 percent until excess capacity in our economy is absorbed and the inflation rate returns sustainably to our 2 percent target. My purpose today is to explain the backdrop and the thinking behind yesterday’s monetary policy decision. In doing so, I will highlight the key developments since our last decision in January and how our views of the economy have evolved. Like your business plans, our outlook is highly uncertain. It is conditional on the evolution of the virus, especially the new variants, and the timing of the vaccination rollout. I will take a closer look at one of the risks around our outlook that we identified in our January Monetary Policy Report. It’s one that matters to you: household spending. And it may be stronger than we expected because of the accumulation of personal savings over the past year. Many Canadians lost their jobs and suffered financial hardship during the pandemic. But others remained employed and have seen their savings rise for two reasons. First, they have been unable to spend on a variety of high-contact services, such as dining out, travelling or going to concerts. Second, they’ve become more cautious about their health and finances. We estimate that these “forced” and “precautionary” savings add up to about $180 billion. There is much uncertainty about what Canadians will do with these savings. This is important because these savings are large enough to meaningfully affect the trajectory of the economy. If Canadians spend more than we expect, it would strengthen the recovery in consumption and employment. I will also discuss some downside risks to our outlook, most of which are related to the pandemic and its possible long-lasting effects. Recent developments Let me begin with a discussion of recent economic developments. In January, we anticipated a slowing of growth in the near term because of the renewed containment measures in Canada and elsewhere. But we also saw a more positive outlook over the medium term. Vaccines had been approved several months earlier than expected, allowing the potential for broad-based immunity to be achieved as early as the end of 2021. Economies outside Canada Since January, the recovery in the global economy has been led by robust growth in the United States. This US rebound reflects the limited impacts of containment measures and ongoing fiscal support. And more fiscal support is on the way. Global and domestic financial conditions and market sentiment remain positive as optimism continues to grow. Long-term bond yields have risen as the outlook for the US economy has improved. For similar reasons, oil and other commodity prices have continued to rise. The Canadian dollar has been relatively stable against the US dollar but has appreciated against most other currencies. The Canadian economy Recent Canadian data indicate that the economy has been quite resilient. Economic activity in the fourth quarter of 2020 and the first quarter of this year -3has been stronger than we anticipated in January. Consumer spending has been less affected by the recent containment measures because people and businesses have adapted to them. House construction and resale activity have been robust, supported by low mortgage rates and a desire for more living space. Stronger foreign demand and rising prices have boosted activity and exports in the oil and gas, mining and manufacturing sectors. Business investment intentions are also rising as confidence in the recovery has improved. In all, the level of economic activity at the end of last year was almost 1 percent higher than we had anticipated. However, recent data tell a mixed story about the labour market, which remains a long way from a full recovery. Job losses in December and January were sizable. The losses were concentrated in Quebec and Ontario, in sectors most affected by the restrictions and mainly among part-time positions. But employment was resilient in some other sectors, surpassing levels seen before the pandemic. The near-term inflation outlook has been revised up. We now expect that inflation will move temporarily above our 2 percent target in the coming months, to around the top of the 1 to 3 percent control range. That reflects rising prices for gasoline, combined with adjustments from the prices of numerous goods and services that fell sharply when the pandemic struck a year ago. We then expect inflation to moderate, given excess capacity in the economy. Accumulated savings and consumption Let’s now turn to the impacts of the pandemic on income, spending and savings. The virus caused unprecedented losses in jobs and labour income. It also reduced household spending. However, extraordinary fiscal support more than offset these income losses, so on balance, household income increased. When you couple this increase with the drop in spending, household savings rose dramatically. This outcome may seem puzzling, but the story behind it largely rests on the pandemic’s uneven impact across sectors and workers. Let’s look first at the impact on labour income. About three million jobs disappeared between February and April 2020. High-contact sectors—primarily services—as well as the lowwage workers employed in these sectors—primarily women and youth—were the hardest hit. Jobs for workers earning less than $16 an hour fell 27 percent in 2020, almost five times the decline in overall employment. Together, the hospitality and retail trade sectors explain 30 percent of the shortfall in employment income, while less than 10 percent can be attributed to sectors at the top of the wage scale (Chart 1). -4Chart 1: Losses in labour income in 2020 occurred primarily in low-wage sectors Share of the total loss in compensation of employees per sector by wage quintiles Retail trade Accommodation and food services Low-wage sectors (1st quintile) 16.9 Wholesale trade 2nd quintile 13.0 Info, culture and recreation 8.6 7.6 26% Durable manufacturing Middle-wage sectors (3rd quintile) Non-durable manufacturing 15.2 Health care 3.0 20% Educational services Construction 4th quintile 30% 12.9 3.4 16% Mining and oil and gas extraction High-wage sectors (5th quintile) 3.9 3.0 8% Public sector -10 -5 % Note: Wage quintiles are based on the Labour Force Survey data for 2019. A negative value indicates a gain in income over 2020 compared with a linear trend (2016–19). Sources: Statistics Canada and Bank of Canada calculations In terms of dollars, Canadians lost an average of $1,600 in labour income over 2020, and low-wage workers suffered much of these losses (Chart 2). However, the drop in household disposable income was more than offset by the government support programs. Combined, the direct fiscal support to households amounted to about $105 billion, or $3,400 per Canadian aged 15 or older.1 Lowwage workers collected a large portion of these transfers. In sum, the disposable income of the average Canadian rose by an additional $1,800 in 2020. 1 The main income support measures were the Canada Emergency Response Benefit ($88.9 billion), the Canada Emergency Student Benefit and the Canada Student Service Grant ($3 billion), one-time federal transfer payments ($10.5 billion; e.g., goods and services tax credit) and provincial special transfers ($3.4 billion). Workers’ incomes were also supported indirectly by the $62 billion paid to firms through the Canada Emergency Wage Subsidy. -5Chart 2: Fiscal transfers more than offset labour income losses in 2020 Income and government transfers per capita (nominal) Total income* -$1,603 Government transfers† $3,410 Disposable income‡ $1,807 -2,000 -1,500 -1,000 -500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Dollars Note: These figures represent the average per capita (population aged 15 and older) gap between a linear trend (2016 –19) and actual data in 2020. * Total income equals primary income minus current transfers paid. † Government transfers equals current transfers received. ‡ Diposable income equals total income plus government transfers. Sources: Statistics Canada and Bank of Canada calculations While disposable income increased, the impact of the pandemic on household spending was even greater. Canadians, on average, spent about $4,000 less in 2020 because of the pandemic. Lockdown measures and fear of the virus kept wallets shut (Chart 3).2 To analyze this further, we can divide spending into four categories: essentials (such as food and clothing), non-essentials (such as cars and other durable goods), hard-to-distance items (primarily services such as travel) and shelter.3 Hard-to-distance items represented more than half of the decline in spending, which reflected a significant reduction in sales at restaurants, bars and hotels. I know many of you felt this acutely. 2 The weakness in spending was mostly due to services consumption (about 75 percent). 3 The consumption categories are based on those used in J. MacGee, T. M. Pugh and K. See, “The Heterogeneous Effects of COVID-19 on Canadian Household Consumption, Debt and Savings,” Bank of Canada Staff Working Paper No. 2020-51 (November 2020). Essentials includes groceries, clothing and medical products as well as urban transit, education, communication and financial services. Non-essentials include vehicles, appliances and jewelry. Hard-to-distance (hospitality) includes food and beverage services as well as accommodation services. Hard-to-distance (others) includes recreational, cultural and transportation services as well as travel expenditures by Canadians abroad. Shelter includes spending related to the ownership, rental or maintenance of a dwelling. -6This drop in spending was greatest in the second quarter of 2020, when the lockdowns were widespread and stringent. In the second half of the year, as restrictions were relaxed, spending rebounded. The strength came primarily in non-essential goods such as motor vehicles, recreational goods and furniture, as people spent more time outdoors and activity in the housing market picked up. However, spending on high-contact services barely moved. Chart 3: Canadians spent on average $4,000 less in 2020 Gap between actual per capita consumption and a linear trend (quarterly data are nominal and seasonally adjusted at annual rate) Dollars 1,000 -$3,980 -$1,153 -1,000 -$778 -2,000 -$1,306 -3,000 -$877 -4,000 -5,000 -6,000 -7,000 -8,000 -9,000 2020 Q1 2020 Q2 2020 Q3 2020 Q4 Hard-to-distance (hospitality) Hard-to-distance (other; e.g., transport and recreational services) Non-essentials (e.g., durable goods) Essentials (e.g., food and clothing) Shelter (e.g., maintenance and repair of dwelling) Consumption Note: These figures represent the per capita (population aged 15 and older) gap between a linear trend (2016 –19) and actual nominal consumption in 2020. Sources: Statistics Canada and Bank of Canada calculations To summarize, these sizable shifts in income and spending resulted in an unprecedented increase in savings in 2020 of about $180 billion, or roughly $5,800 per Canadian (Chart 4). Bank research suggests about 40 percent of the extra savings was accumulated by high-income households. Their incomes were less affected, and they typically spend relatively more on non-essential and hard-to-distance items. On the other hand, low-income households accumulated less than 10 percent of the savings.4 These results are also supported by the Canadian Survey of Consumer Expectations, which indicates that 47 percent of households earning more than $100,000 were able to save more than Chart 4: Canadians accumulated on average $5,800 in extra savings by the end of 2020, mostly by high-income households Extra savings per capita (seasonally adjusted) and share of accumulated savings per income quintiles Dollars 6,500 6,000 5,500 $1,807 4,500 4,000 $1,545 3,500 3,000 $1,055 2,500 2,000 $3,980 $3,083 1,500 $2,278 1,000 $337 2020 Q1 2020 Q2 Spendings shortfall 2020 Q3 Extra savings by income quintiles 9.2% 5,000 13.3% 17.6% 22.7% 37.2% 2020 Q4 Disposable income gains Sources: Statistics Canada and Bank of Canada calculations What have the savings been used for, so far? It seems that most of the extra savings is sitting in bank accounts. The total value of personal deposits in banks increased by $150 billion between February and December 2020.5 This exceeded the average pace at which deposits have been increasing over the past decade by about $100 billion.6 usual because of the pandemic, compared with only 20 percent for households earning less than $40,000. 5 Statistics Canada Table: 10-10-0116, vector: V41552791 6 If deposits had kept growing at their trend growth following the global financial crisis, they would have increased by only $50 billion from February to December. Therefore, deposits increased by $100 billion more than the historical trend would have predicted. -8How about the rest of these savings? Evidence from survey responses and credit data indicate that some have been used to pay down debt.7 Given the strength in housing market activity since the summer, some have been used to purchase houses, likely by higher-income earners. Similarly, some have probably been used to purchase financial assets, such as mutual funds or guaranteed investment certificates, perhaps for a registered retirement savings plan or a taxfree savings account. The extraordinary size and nature of these savings—and their potential impact if spent—have sparked much debate. To get at this uncertainty, we added questions to the Bank’s Canadian Survey of Consumer Expectations. In the November survey, only 5 percent of respondents said they plan on spending most of these savings in 2021 and 2022. Another 14 percent plan on spending some. Based on these responses and evidence from other surveys, we assumed in our January projection that households would not dip into these savings. Instead, we expected that their savings rate would decline from a peak of 27.5 percent in the second quarter of 2020 to below 4 percent by the end of 2023, as the need for precautionary savings faded. However, a positive surprise to spending is possible, especially if the virus is brought under control and household confidence improves. Let’s now consider the potential impact of households drawing down on their savings for consumption. Macroeconomic consequences of a savings drawdown for consumption We can start by thinking about how much would be spent on goods and services and over what time horizon. As with many things related to this pandemic, this buildup of savings is unique because it stems primarily from a dramatic decline in spending on services. So, it is not clear how much of past shortfalls will be made up. I am not going to get more frequent haircuts, but my family might initially want to eat out more often, take an extra vacation or buy a new television. Comparisons are sometimes made with what happened during and after World War II. But during the war years, it was spending on durable goods—not services—that was supressed. Such a dramatic reversal of spending is unlikely to occur now since the purchase of goods has been much less restricted. A positive surprise could still occur if households in Canada continue to buy houses and goods at a similar pace as in recent quarters and also dip into savings to increase their spending on services. To illustrate the possible economic impact of a drawdown in savings, we consider a scenario in which certain goods and services could experience higher-thannormal spending because of the release of pent-up demand. In this scenario, we assume that households would spend about $25 billion, or approximately 7 For example, the stock of household non-mortgage loans had fallen by 1.5 percent year over year by December 2020—the largest decline on record since 1991. Source: Statistics Canada. Table 36-10-0639-01, vector V1231415611. -915 percent of these savings. We based this figure on the estimated propensities to consume out of these savings by type of good or service and by income. We can’t be sure about the time horizon for this spending because we don’t know when life will return to normal. We assume that households will spread their additional spending over the period starting in the second quarter of 2021 to the end of 2023. Spending is assumed to rise over 2021 and then be concentrated in late 2021 and early 2022, after broad immunity is achieved. In this scenario, the recovery in household consumption is brought forward. Nominal household spending growth in 2021 would rise from 4.3 percent—which we projected in January—to 5.0 percent. At the peak, spending would increase at an annual pace of roughly $500 per Canadian over the last quarter of 2021 (Chart 5). That is equal to an additional $4 billion being added into the economy in that quarter alone. We estimate that much of the extra savings would be spent on high-contact services, including transportation, accommodation, and food services. Because the demand for labour would increase, we estimate that employment would rise by more than we had projected—by about 30,000 jobs, on average—each year over the next three years, with a peak increase of 40,000 jobs in 2022. Such a boost in demand and employment would greatly benefit the businesses and workers, such as yours, who have suffered the most during this crisis. Chart 5: At peak, the boost to consumption per capita would be $500 in 2021Q4 a. Total consumption b. Hard-to-distance—Hospitality Per capita, nominal and seasonally adjusted at annual rate Per capita, nominal and seasonally adjusted at annual rate Dollars 3,000 Dollars 50,000 2,600 45,000 2,200 1,800 40,000 1,400 35,000 Baseline—January MPR Upside risk Note: MPR is the Monetrary Policy Report. Sources: Statistics Canada and Bank of Canada calculations 1,000 Baseline—January MPR Upside risk Note: MPR is the Monetrary Policy Report. Sources: Statistics Canada and Bank of Canada calculations Key downside risks While it is a useful exercise to assess the potential effects on households dipping into their accumulated savings, this positive surprise is not guaranteed. There are also important downside risks. In January, we identified a few key risks that are still relevant. - 10 In particular, in the near term, there is the risk of another wave of infections and lockdowns as more contagious variants spread, the rollout of the vaccines is delayed, or the vaccines are less effective against the variants. Over the medium term, businesses may face increasing financial stress. We could see more firms close as the recovery progresses slowly and our economy restructures in response to more persistent shifts in behaviour. For example, the post-pandemic world will likely see more people working from home and shopping online. This could reduce the demand for office and retail space and related services in downtown areas. Consequently, more businesses could permanently shut their doors and let employees go. There are about 850,000 fewer jobs now than a year ago, and the ranks of the long-term unemployed are increasing. Prolonged spells of unemployment could erode workers’ skills and make it more difficult for them to find a job.8 While new firms may be established and workers retrained, this will take time. Monetary policy stimulus will be needed for an extended period to mitigate these risks and support both the restructuring and recovery of our economy. Our decision So, let me now turn to how all of this fed into the Bank’s interest rate decision yesterday. As we prepared for the decision, my colleagues on Governing Council spent a lot of time considering the signals in the latest economic data. While the unemployment rate remains elevated, economic growth in the fourth quarter was stronger than anticipated. So, the Canadian economy had more momentum at the start of the year than we had anticipated. Therefore, we are no longer expecting the economy to shrink during the first quarter. Housing construction and resale activity has been particularly strong. We noted the large house price increases in some markets that will warrant close monitoring for speculative activity. Improving foreign demand, mostly from the United States, and higher oil and other commodity prices are positive signs that raise the prospects of stronger export growth and a rebound in investment. At the same time, Governing Council considered the recent rise in unemployment, the very uneven impacts of the job losses and the growth in longterm unemployment. There are now about twice as many job losses as there were at the height of the Great Recession a decade ago. It will take some time for the labour market to recoup these losses, given that the economy will be restructuring as it recovers. One issue we discussed is the impact of this restructuring on economic capacity. We will be exploring the issue of capacity further in our next Monetary Policy Report in April. 8 T. Macklem, “Canada’s Labour Market: Rebound, Recuperation and Restructuring” (speech to the Edmonton Chamber of Commerce and Calgary Chamber of Commerce, Calgary and Edmonton, Alberta, February 23, 2021). - 11 We also talked a lot about the high levels of uncertainty around the outlook stemming from the risk of the spread of new variants of the virus and the possibility of outbreaks that could lead to renewed containment measures. We also discussed the outlook for inflation, which we expect will move to around the top of the band in the next few months. But this increase will not be sustained. As base-year effects dissipate, the large amount of slack in the economy should cause inflation to moderate. Ultimately, Governing Council decided that the economy still requires extraordinary support from our monetary policy. We reaffirmed our commitment to keep our key policy rate at a record low 0.25 percent until economic slack is absorbed, so inflation can return sustainably to its 2 percent target. In our January forecast, we projected this would not happen until into 2023. We will update our forecast in April. We also agreed to maintain our program of government bond purchases at its current pace of $4 billion a week. As we continue to gain confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required. I hope this gives you a sense of our decision-making process. In closing, let me stress that the Bank of Canada will remain committed to providing the appropriate degree of monetary policy stimulus to support the recovery and achieve our inflation objective. We will do our part to help Canadians get beyond COVID-19. And I can’t wait for the day when I join my family and friends at a restaurant, raise a glass and toast the end of the pandemic. That day is coming, hopefully soon.
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Remarks (delivered virtually) by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, to the CFA Society Toronto, Toronto, Ontario, 23 March 2021.
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Remarks by Toni Gravelle Deputy Governor of the Bank of Canada CFA Society Toronto March 23, 2021 Toronto, Ontario (via webcast) Market stress relief: the role of the Bank of Canada’s balance sheet Introduction Good afternoon. I always enjoy engaging with CFA charterholders, even virtually.1 It’s hard to believe we’ve been dealing with COVID-19 for as long as we have. The past year has had a profound impact on people’s lives, both in terms of their health and their economic and financial well-being. Canadians count on the Bank of Canada to make sure that the financial system works smoothly, especially in tough times when they depend on credit more than usual. So, a year ago, the Bank took unprecedented actions to ensure that the financial system could keep functioning normally and the economy could recover. Those goals are intertwined. Markets have to work for the economy to work—not just for bankers and investment managers, but for Canadians of all walks of life. An essential part of markets working well is liquidity: the ability to buy, sell, lend or borrow with relative ease. Think of it as the grease that keeps markets lubricated.2 CFA (chartered f inancial analyst) is one of the highest distinctions in the investment management prof ession. For more on the importance of liquidity, see T. Gravelle, “Economic Progress Report: Keeping Markets Working,” (speech delivered virtually to the Greater Sudbury Chamber of Commerce, Sudbury, Ontario, June 4, 2020). As well, for a summary of the Bank’s response to the COVID-19 pandemic and how largescale purchases of financial assets fit into it, see P. Beaudry, “Our Quantitative Easing Operations: Looking Under the Hood,” (speech delivered virtually to the Greater Moncton Chamber of Commerce, the Fredericton Chamber of Commerce, and the Saint John Region Chamber of Commerce, Fredericton, Moncton and Saint John, New Brunswick, December 10, 2020). I would like to thank Ron Morrow, Tamara Gomes and Tiago Figueiredo f or their help in preparing this speech. Not f or publication before March 23, 2021 13:15 Eastern Time -2When COVID-19 struck last year, it caused enormous uncertainty about how the next weeks and months would play out. And whenever the economic outlook becomes extremely uncertain, market participants seek to hold cash. Suddenly, investors large and small were scrambling to sell their financial assets—even those normally considered risk-free, such as Government of Canada bonds—so they could meet their margin calls and build up their cash buffers. With this dash for cash so widespread, everyone was looking to sell assets and few were willing to buy. Markets came under extreme stress and seized completely. Households and businesses also became extra cautious: companies were drawing down their lines of credit at an unusually fast pace, and households were building up their savings or deferring loan payments. At the height of the crisis, the Bank’s top priority was to quickly restore well-functioning markets so that households, businesses and governments could still access credit— either directly from markets or from banks and credit unions. The Bank was well positioned for this challenge. As a central bank, we have a mandate to be on the look-out for system-wide stresses, and we have the tools—that leverage our balance sheet—to fix them. I would like to emphasize, however, that our decision to act was not something we considered lightly. There is a high bar for using these extraordinary tools. The last time we stepped in to address issues like these was more than a decade ago, during the global financial crisis. With that in mind, I’ll begin by reviewing how the Bank responded to market-wide stress. Then, I’ll talk about the thinking behind our actions and update you on the status of our facilities because markets returned to working normally some time ago. Our actions have grown the Bank’s balance sheet substantially. So I’ll close by discussing some policy implications of this and what my Governing Council colleagues and I are considering as we explore how the balance sheet could evolve from here. How we responded to market-wide stress Let me first expand a bit more on what happened when COVID-19 struck. By early last March, as the world was realizing we were in a global pandemic, uncertainty and fear gripped markets. A dash-for-cash mentality took hold across financial market participants, and liquidity dried up throughout the financial system. The Bank responded swiftly and supplied extraordinary liquidity, in line with our role as lender of last resort, which I’ll discuss later. We launched a broad suite of programs— including some that we used during the global financial crisis and others that we created from scratch. Supplying the funding that financial institutions needed We started by addressing the severe, immediate liquidity issues affecting financial institutions in Canada. We knew that if we helped supply them with funding, they would be able to meet the greater demand for credit that was coming from other parts of the financial system as well as from households and businesses. -3So, the first action we took was to inject significant amounts of liquidity into the financial system by ramping up our repo operations.3 Ramping up term repos is the Bank’s go-to tactic for alleviating acute market-wide funding shortages and supporting market functioning more generally. We increased the frequency and size of these operations—peaking at $24 billion per operation—and offered funds for longer terms. In addition, we let financial institutions use a wider range of securities as collateral, which made it easier for us to lend them larger amounts than usual. Through these extended term repos, we lent roughly $200 billion to financial institutions in March and April. We also launched our contingent term repo facility, which broadened the list of financial institutions that we engage with for these operations. This provided liquidity access to large asset managers that are active in repo markets. Restoring and maintaining well-functioning markets The dash for cash caused liquidity to dry up sharply in several core fixed-income markets—including, surprisingly, the market for Government of Canada (GoC) bonds. The impact on the market for GoC bonds was particularly worrisome. These debt securities are considered very safe and serve as the benchmark, or reference rate, for almost every other credit market. If the GoC bond market can’t function smoothly, it’s hard for the rest of the system—and the economy—to work properly. Starting in mid-March last year, the Bank rolled out several new asset purchase facilities to support liquidity and restore smooth functioning in a wide range of markets.4 Our ability to do this quickly and effectively is a testament to the calibre, dedication and expertise of our staff. The Bank’s purchases helped rebalance the lopsided trading flows in core debt markets, allowing buyers and sellers to set prices. Also, because securities dealers only have so much room for risk on their own balance sheets, our purchases helped free up dealers’ capacity to provide liquidity in these markets. Short-term funding pressures To complement our extended repo operations, we started with programs designed to unfreeze markets that are key sources of short-term funding for businesses and governments. For example, to bolster the capacity of commercial banks to support businesses’ shortterm credit needs, we launched a facility to buy bankers’ acceptances. We also began purchasing commercial paper to provide funding for a wide range of companies and financial institutions. A repo—short for repurchase agreement—is basically a collateralized loan and, as such, provides f unding liquidity to financial institutions for a set term, backed by high-quality collateral. For more details on all of the Bank’s actions in response to COVID-19, see the “COVID-19: Actions to Support the Economy and Financial System” page on the Bank’s website. -4Government of Canada bond purchases As well, we began making large-scale purchases of GoC bonds in the secondary market. We launched the Government of Canada Bond Purchase Program (GBPP) at a weekly pace of at least $5 billion, across the spectrum of short- and longer-term bond maturities. As I’ll discuss in a few minutes, the focus of the program later pivoted from restoring market functioning to providing additional monetary policy stimulus while our policy interest rate is at its effective lower bound of 0.25 percent. 5 Provincial and corporate bond purchases Also, in April, we announced we would be launching programs to thaw other important bond markets and support their functioning through purchases in the secondary market. We pledged to buy up to $50 billion of provincial bonds and up to $10 billion of highquality corporate bonds. The thinking behind our actions Collectively, our actions and those that other major central banks took in their own jurisdictions helped to stabilize global financial conditions. The steps we took in Canada to support core markets reflected our responsibility to act as lender of last resort when the financial system is short of liquidity and not working properly. This role goes back centuries. The original description of a central bank’s role as lender of last resort came in 1802 from Henry Thornton, an economist and leader in Britain’s abolitionist movement. But it wasn’t until the late 1800s that British journalist Walter Bagehot created the better-known dictum that, in a crisis, a central bank should lend freely to sound institutions, against good collateral, and at penalty rates.6 Bagehot was referring to central banks lending to individual banks that faced a sudden funding squeeze, such as a run on their deposits. But in modern times, where financial markets have become another important source of funding, the lender-of-last-resort role of central banks has evolved. Today’s lender of last resort can be thought of as a liquidity provider of last resort—ready to resolve market-wide stresses when the financial system cannot find its footing or when debt markets are frozen. At the same time, Bagehot noted that while it was important to reduce financial stress, it was also critical to do so in ways that mitigate moral hazard. This remains true today. Moral hazard emerges whenever market participants or other economic actors feel that they can engage in risky behaviour without bearing consequences if things go wrong. Moral hazard can be limited by offering extraordinary liquidity only in severe situations and by ensuring that such actions have a predetermined expiry date or are unwound when they’re no longer needed. Once crisis tools have served their purpose, central As we pivoted to this objective, we decreased and eventually eliminated our purchases of short-term GoC bonds because those purchases provide little monetary policy stimulus in terms of lower term premiums. W. Bagehot, Lombard Street: A Description of the Money Market (London: Henry S. King, 1873). -5banks should scale them back to show that they are emergency measures and don’t reflect business as usual. Facilities can also be structured in ways that discourage market participants from relying on them to manage their funding needs in normal times—for example, by offering liquidity at a cost that’s above typical market rates. The Bank’s response to market-wide stress last year included some programs that carried different degrees of punitive pricing and others that did not. Because our top priority was to thaw frozen markets quickly, we felt that punitive pricing could undermine that critical objective in some cases. We also lent at prevailing market-determined rates through an auction process but sought to constrain the unwarranted use of most of the facilities in other ways.7 We will be reviewing our various extraordinary actions to assess whether they were calibrated ideally and whether we could do anything differently in future episodes of market stress.8 Major central banks, international authorities and regulators, and policy organizations such as the Financial Stability Board are actively studying these issues too. In addition, we are all looking at whether any further structural reforms could be made to improve the resilience of the financial system and minimize the likelihood that our extraordinary tools will be needed in the future.9 The main point is that when central banks provide liquidity, we have to do so in ways that don’t encourage market participants to take undue risks in normal times. Our actions must be targeted at specific issues and scaled back as those are resolved. Adjusting as market conditions improve That is why we gradually adjusted our facilities as conditions improved. In the autumn, we wound down a couple of facilities, including the program to support markets for bankers’ acceptances. We also fine-tuned our repo operations, making them less frequent and scaling back the types of collateral that we would accept. And now I’d like to announce that, in the coming weeks, the Bank will suspend or discontinue our remaining market liquidity-focused crisis programs. Specifically, we will suspend our current term repo operations indefinitely beginning mid-May. Similarly, the contingent repo facility will be deactivated in early April. We can take these steps because now there is ample system-wide liquidity for financial institutions to draw from. This is both in terms of their own unusually high levels of deposits, as Canadians save more during the pandemic, and the large amount of For example, we set conservative reserve prices for the auctions that we use to purchase corporate and provincial bonds. See J.-S. Fontaine, C. Garriott, J. Johal, J. Lee and A. Uthemann, “COVID-19 Crisis: Lessons Learned f or Future Policy Research,” Bank of Canada Staff Discussion Paper No. 2021-2 (February 2021). For a good, recent discussion from abroad, see A. Hauser, “From Lender of Last Resort to Market Maker of Last Resort via the Dash for Cash: Why Central Banks Need new Tools for Dealing with Market Dysfunction,” (speech at Thomson Reuters Newsmaker, London, United Kingdom, January 7, 2021). -6cash—more specifically, settlement balances—that we have added to the financial system.10 In addition, three asset purchase programs—for commercial paper, provincial bonds and corporate bonds—will not be extended beyond their upcoming planned one-year end dates. Corporate and provincial borrowers have unfettered access to fully functional debt markets. And credit spreads for most of these borrowers are either at or below prepandemic levels. So it’s clear that these extraordinary facilities are no longer required. Rest assured, though, that the Bank will be ready to reactivate any of these market programs should severely stressed market conditions ever re-emerge. Where the Bank’s balance sheet stands now As I said at the outset, our facilities and purchases of financial assets have grown the Bank’s balance sheet considerably. It now stands at close to $575 billion, more than four times bigger than before the pandemic, when it was $120 billion (Chart 1). Chart 1: Bank of Canada total assets, weekly data Can$ billions Jan-2020 Apr-2020 GoC bonds (excluding RRBs) Jul-2020 GoC treasury bills Oct-2020 Repos Jan-2021 Bankers' acceptances All other assets Note: RRBs are real return bonds. In this chart, Government of Canada (GoC) bonds purchased in primary markets are measured a t amortized costs. All other bonds, including GoC bonds purchased in secondary markets, are measured at fair value. “All other assets” includes provincial treasury bills and bonds, corporate bonds and commercial paper. A full list of assets can be found on the Bank of Canada’s we bsite. Source: Bank of Canada Last observation: March 17, 2021 Ultimately, our actions to support liquidity and markets provided timely support for the economy, too. They ensured that the impact of our very low policy interest rate—which has been at 0.25 percent since late last March—could be felt in all corners of the economy and that credit could keep flowing to Canadians to set the stage for recovery. But it’s useful to think of the assets added to the Bank’s balance sheet as falling into roughly two separate buckets serving different objectives. Settlement balances (or reserves) are a unique type of money that the central bank creates. They are a normal part of central banking operations. Financial institutions use them to settle payments among themselves. We pay interest on these balances, like deposits at a regular bank. For a bit more detail on how they work, see Bank of Canada, “Understanding quantitative easing” (December 2020). -7The first bucket contains our holdings generated from the programs and facilities aimed at supporting market functioning. The second bucket holds our GoC bond purchases. As I noted a few minutes ago, at the height of the market stress, these purchases were largely aimed at supporting market functioning. You may recall I also said that, as we moved into summer, the purchases’ main impact shifted to bolstering our monetary policy stimulus. Making large-scale purchases of GoC bonds is known as quantitative easing, or QE. QE works through different channels, and the importance of each depends on what’s happening in markets and the economy.11 During times of market stress, QE purchases mostly help improve liquidity, ensuring that the GoC bond market and other debt markets can function smoothly. But once stresses have dissipated, QE purchases also help lower borrowing costs for households, businesses and governments by putting downward pressure on bond yields and lending rates throughout the financial system. The first bucket—our support for market functioning—caused the rapid growth of the balance sheet during the worst part of the crisis last year, roughly from March to the end of June. By the end of April 2021, though, GoC bond holdings are expected to be the largest piece of the balance sheet by far—at roughly $350 billion, or more than 70 percent of total assets. This is not unusual because GoC bonds are typically the largest asset on our balance sheet. What’s different now is the sheer size of those holdings. Still, measured against the size of our economy, the value of QE assets that we’ve purchased since last March is broadly similar to that of many other central banks. We’re below the Bank of England, about tied with the US Federal Reserve and ahead of the European Central Bank and the Swedish Riksbank (Chart 2). By another measure, however, our purchases stand out. Our GoC bond purchases since last March represent a little over 35 percent of the total amount of GoC bonds that are outstanding—by far the highest among this group of central banks (Chart 3). For more details on the different channels that QE works through, see Bank of Canada, “Monetary Policy Tools,” Monetary Policy Report (July 2020): 27–28. -8Chart 2: Governm ent bond purchases as a share of 2020Q1 annualized gross dom estic product Chart 3: Holdings of governm ent bonds as a share of total governm ent bonds outstanding % % United Euro area Kingdom United States From March 2020 Canada Sweden Before March 2020 Note: All nominal sovereign bond purchases include purchases at primary auctions for balance sheet management. Note that the last observation for the euro area is January 21, 2021. Data for Sweden and the euro area may also include inflation-protected securities. Purchases from March 2020 include primary and secondary market purchases. Sources: Bank of England, European Central Bank, US Federal Reserve Bank, Bank of Canada, Sveriges Riksbank and Bloomberg Last observation: March 16, 2021 Sweden United Kingdom Canada From March 2020 United States Euro area Before March 2020 All nominal sovereign bond purchases include purchases at primary auctions for balance sheet management. Note that the last observation for the euro area purchases is January 21, 2021. Data for Sweden and the euro area may also include inflation-protected securities. Last observation for government bonds outstanding is February 2021, except for the euro area, which is as of 2020Q3. Last observation: for Sources: Bank of England, European Central purchases March 16, 2021; for outstanding, Bank, US Federal Reserve Bank, Bank of Canada, Sveriges Riksbank and Bloomberg February 2021 Whether you consider our holdings relatively large or relatively small depends on the metric you look at. Let me now turn to how these could evolve. The future of our programs’ asset holdings The increase in the balance sheet from programs directed at market functioning will largely roll off because many of those were focused on shorter-term market support. This has already happened for our purchases of short-term assets such as bankers’ acceptances and commercial paper. For short-term funding facilities, such as term repos, the process is well underway: most significantly, about $120 billion is set to roll off between mid-March and the end of April. As it does, the Bank’s balance sheet—after being relatively stable since July—will decline to about $475 billion, about $100 billion smaller than its current level. In terms of the longer-term asset holdings, the program to buy corporate bonds currently sits at about $200 million in assets, while the program to buy provincial bonds sits at just over $17 billion. At this point, the Bank doesn’t intend to sell any of the assets purchased through either of these programs. Of note, at the end of June we will release transaction-level details for the asset purchase programs that are expiring and for the facilities and programs that we have already discontinued. This supports our commitment to be fully transparent about our actions once the programs end. The new details will complement our regular reporting of the total assets purchased through these programs since we launched them. -9Considerations for adjusting QE Regarding our ongoing purchases of GoC bonds, Governing Council is evaluating how the process of adjusting these could unfold. During the current purchase phase of QE, we continue to add monetary policy stimulus because our GoC bond holdings are growing. In October, we recalibrated the program to focus more directly on longer-term borrowing rates. This reduced the amount of term risk that market participants need to absorb, putting downward pressure on term premiums. This shift in composition allowed us to reduce our weekly purchases to a minimum of $4 billion, without reducing the overall stimulus coming from QE. At the time of our January Monetary Policy Report, we indicated that if the economy plays out in line with or stronger than our economic projection, we won’t need as much QE stimulus over time. And in our March policy decision statement, we said that as we continue to gain confidence in the strength of the recovery, we will gradually adjust the pace of our QE purchases. We also indicated that first-quarter growth appears to be better than we expected in January. We will have a new full economic projection at our April policy decision. I want to be clear here: moderating the pace of purchases while adding to our holdings would simply mean that we are still adding stimulus through QE but at a slower pace. It would not mean we are removing stimulus. We would be easing our foot off the accelerator, not hitting the brakes. When we start gradually dialling back the amount of incremental QE stimulus that we are adding, we will eventually get down to a pace of QE purchases that maintains—but no longer increases—the amount of stimulus being provided. That is, a pace where our GoC bond holdings are largely stable and we reinvest the proceeds of maturing assets. At that point, the accumulated amount of GoC bond holdings would still represent a significant amount of stimulus in the system. I’d like to stress a few things about our journey to this reinvestment phase of QE. First, the process for getting there will be gradual and in measured steps. Second, the timing of these moderations to the pace of purchases, and the amount of time that we take to get to the reinvestment phase, will be guided by our evolving assessment of the macroeconomic outlook and the strength and durability of the recovery. And third, adjusting the pace of QE purchases won’t necessarily mean that we have changed our views about when we will need to start raising the policy interest rate. These decisions are distinct. We have committed to continuing our QE program—by which we mean positive net purchases—until the recovery is well underway. Meanwhile, a decision on the policy rate is linked to the economic outcomes described in our forward guidance—which says that we will leave the policy rate at 0.25 percent until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the forecast that we published in January, we projected this wouldn’t happen until into 2023. So, we would arrive at the reinvestment phase of QE some amount of time before we start to increase the policy interest rate. -10Eventually, we will reach a point where Governing Council is of the view that the outcomes outlined in our forward guidance have been achieved and that we will need to start raising our policy rate in order to sustainably achieve our inflation objective. How long it takes to transition through these different steps will, of course, depend on how the trajectories for economic activity and inflation unfold. As part of this journey, we will be mindful of the possibility that our stimulative monetary policy—while essential to achieving our inflation objective—could increase financial vulnerabilities. Rest assured that throughout the normalization process for monetary policy, we will make every effort to communicate clearly and in a timely manner. Conclusion It’s time for me to conclude. We have come a long way from how things were a year ago when severe market-wide stresses forced the Bank to act as lender of last resort to the financial system. Our efforts in the face of COVID-19 have had their intended effect. Financial markets have been working much better for some time. Partly as a result of markets functioning smoothly, the economy continues to recover, and the downturn last year—while sharp and severe—was not as bad as it could have been if market stresses had persisted. The Bank’s plans to suspend or discontinue several facilities and programs reflect the fact that these were extraordinary central bank actions. It was always our intention to withdraw them once we became confident that financial markets could function without this added support. Such actions must be reserved for times of severe market stress. As such, they are not a substitute for the steps that market participants take on their own in normal times to manage risk. While the assets we acquired in the recent crisis to support market functioning will decline, our QE program that supports our monetary policy actions is continuing to add to the Bank’s balance sheet. As new information on the strength of the recovery arrives, Governing Council will continue discussions about gradually adjusting the pace of our QE-related purchases.
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Opening Statement by Mr Tiff Macklem, Governor of the Bank of Canada, Ottawa, Ontario, 21 April 2021.
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Tiff Macklem: Monetary policy report press conference Opening Statement by Mr Tiff Macklem, Governor of the Bank of Canada, Ottawa, Ontario, 21 April 2021. * * * Good morning. Thank you for joining me to discuss today’s policy announcement and the Bank’s Monetary Policy Report (MPR). My message today is twofold. First, the economic outlook has improved, and Governing Council is more confident in the resilience of the economy to the pandemic. Canadian households and businesses are adapting to the virus, finding new ways to shop, serve customers and work remotely. More important still, the rollout of vaccines is progressing, and we expect better times ahead. But second, most of Canada is now dealing with more contagious variants of the virus. The third wave has introduced a new dimension of uncertainty and is straining health care resources in some regions. This will slow the return to work for many low-wage earners, young people and women in hard-to-distance sectors who have borne the brunt of job losses throughout the pandemic. Too many Canadians remain out of work and there is still considerable excess supply in the economy. I understand how difficult this third wave is for Canadians hoping to return to work and businesses struggling to cope with the latest restrictions. I know the toll has been immense, and this latest setback is tough. You can be sure that the Bank of Canada will continue to support Canadians and the Canadian economy throughout the recovery. Before I turn the Governing Council’s policy discussions, let me say a word about the format of the MPR itself. You will notice two new boxes in the Report—boxes 2 and 3—that review the changes to the global and Canadian projections since January. We have added these boxes to enhance the transparency of our analysis and more clearly explain changes to our forecast. We intend to make these a regular feature of our MPR and we look forward to your feedback on this innovation. Let me now turn to the Governing Council’s deliberations. We spent a lot of time talking about incoming economic data. The first quarter is now looking like it was considerably stronger than we were expecting back in January. This partly reflects a better global backdrop, particularly in the United States. The US recovery is being supported by a rapid rollout of vaccines and substantial fiscal stimulus, which is bringing spillover benefits to Canada through higher demand for exports and stronger commodity prices. But the most important factor in the unexpected economic strength has been the resilience and adaptability of Canadian households and businesses. Lockdowns through the second wave had much less economic impact than they did through the first wave. And as restrictions were eased, the economy bounced back quickly with substantial job gains in February and March. The third wave is a new setback, and we can expect some of these job gains to be reversed. But the performance of the economy in recent months has increased our confidence in the underlying strength in the recovery. With the vaccine rollout progressing, we are expecting strong consumption-led growth in the second half of this year. Fiscal stimulus from the federal and provincial governments will also make an important contribution to growth. Strong growth in foreign demand and higher commodity prices are expected to drive a solid rebound in exports and business investment, leading to a more broad-based recovery. Overall, we now project that the economy will expand by around 6½ percent this year, slowing to about 3¾ percent in 2022 and 3¼ percent in 2023. 1/3 BIS central bankers' speeches You won’t be surprised to hear that we also spent some time discussing what is happening in the housing market. The pandemic has led to some unique circumstances. With so many households working and studying at home, we see many people wanting more living space. And interest rates have been unusually low, making borrowing more affordable. While the resulting house price increases are rooted in fundamentals, we are seeing some signs of extrapolative expectations and speculative behaviour. Given elevated levels of household debt and the risks that households may overstretch in the face of rising housing prices, we welcome the recent proposal by the Superintendent of Financial Institutions to introduce a fixed floor to the minimum qualifying rate for uninsured mortgages. New measures just announced in the federal budget will also be helpful. We are watching developments in the housing market very closely, and we will have more to say about this in our Financial System Review next month. The Governing Council also spent time discussing estimates of the amount of slack in the economy and the outlook for potential growth. With the economy proving more resilient to the pandemic and vaccines rolling out, we are hopeful there will be less labour-market scarring and less lost capacity than we earlier feared. Bankruptcies have been low, and surveys of investment intentions and our own Business Outlook Survey both suggest that many companies are speeding up investments in digital technologies. These factors are reflected in our decision to raise our estimate of the economy’s potential output. But it bears stressing that considerable uncertainty surrounds our estimate of potential output. We have never seen a recession or recovery like this. The pandemic continues to have widely different impacts across sectors, businesses and groups of workers. Further, economic restrictions have affected both demand and supply, making it more difficult to interpret economic signals. This all means that as the recovery continues, we will be paying attention to a broad spectrum of indicators of slack, including a range of labour market measures. Of course, we also discussed the outlook for inflation. We know that over the next few months, inflation will rise due to base-year effects, which simply reflect the impact one year later of the plunge in some prices at the start of the pandemic. When combined with a further rise in gasoline prices, we expect inflation to rise temporarily to around the top of our 1 to 3 percent control range. Governing Council is looking through this temporary increase. We expect inflation to ease back toward 2 percent in the second half of this year and fall further due to the excess capacity in the economy. Inflation should then return to 2 percent on a sustained basis as slack is absorbed in the second half of 2022. Taking into account the improved economic outlook and the considerable slack that remains, Governing Council judged that the recovery still needs extraordinary support from monetary policy. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. Based on the Bank’s latest projection, this is now expected to happen some time in the second half of 2022. In the current context, though, there is considerable uncertainty about the timing, particularly in light of the complexity involved in assessing supply and demand that I mentioned earlier. Our forward guidance continues to be reinforced and supplemented by our quantitative easing (QE) program. We decided to adjust the program to a target of $3 billion weekly net purchases of Government of Canada bonds. That is down from a minimum of $4 billion per week, while we will be maintaining broadly the same maturity composition of our purchases. This adjustment to the amount of incremental stimulus being added each week is consistent with the progress toward economic recovery we have already seen. Looking ahead, further adjustments to the pace of net purchases will be guided by our ongoing 2/3 BIS central bankers' speeches assessment of the strength and durability of the economic recovery. If the recovery evolves in line with or stronger than in our latest projection, then the economy won’t need as much QE stimulus over time. Further adjustments to our QE program will be gradual, and we will be deliberate both in our assessment of incoming data and in the communication of our analysis. We are committed to providing the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective. With that, let me stop and turn to you for questions. 3/3 BIS central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 14 July 2021.
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Tiff Macklem: Release of the Monetary Policy Report Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 14 July 2021. * * * Good morning. Thank you for joining me to discuss today’s policy announcement and the Bank’s Monetary Policy Report (MPR). My message today is twofold—of increased confidence and of continued attention. A year ago, at the time of my first MPR as Governor, the economy was in a very deep hole. We were just coming out of the first wave of the virus, more than two million Canadians were unemployed, and inflation was well below our 1 to 3 percent target range. Uncertainty was extremely high. Vaccines were being developed, but nobody knew when they would be available or even if they would prove effective. Since then, a lot has happened. We have endured two more waves of the virus, and this has held back recovery. But thanks to the resilience and ingenuity of Canadian households and businesses, and exceptional fiscal and monetary policy support, the economy has continued to grow. It has been choppy and very uneven, and everyone has had to cope with a lot of uncertainty. But the economy has proven to be impressively resilient. And now highly effective vaccines have arrived. With cases falling, rapid progress on vaccinations and easing containment measures, the Governing Council is increasingly confident that growth will rebound strongly as the economy once again reopens, and this time growth will be more durable. Second, as the unique circumstances created by the pandemic continue to evolve, there is continued need for careful attention to the dynamics of the recovery and inflation. Globally, the economic outlook remains highly dependent on the course of the virus and new variants are a concern. In Canada, we still have some way to go to a complete recovery, and the rebound in economic activity will proceed at different speeds across sectors. The process of reopening the economy won’t be entirely smooth. For example, we are experiencing supply bottlenecks for some goods and services as demand rebounds faster than supply can ramp back up. These unique circumstances of the pandemic are now helping to push inflation temporarily above our target band. As we reopen the economy, we expect to see some volatility, and we will continue to pay close attention to the progress of the recovery and to the evolution of inflation. Before I turn to your questions, let me say a few words about the Governing Council’s policy discussions. We spent some time considering the progress of and risks to the global recovery. The global economy is recovering strongly, but vaccination rates and growth are uneven across advanced and emerging-market economies. Growth is particularly strong in the United States, which is further ahead in its reopening and benefitting from substantial fiscal stimulus. Oil prices have moved higher with stronger global demand, while other commodity prices remain elevated. The Canadian dollar is close to where it was in April relative to the US dollar, but it is slightly stronger against a broader basket of currencies. Coming back to Canada, we discussed the many ways the pandemic is affecting the economy and the prospects for recovery. There was a strong consensus that growth will strengthen and broaden in the months ahead as consumers return to more normal spending patterns, higher 1/3 BIS central bankers' speeches foreign demand lifts exports and businesses increase investment. Consumption is expected to continue to lead the recovery. Some of the sectors hit by lockdowns, including retail, restaurant, and other hard-to-distance sectors, are already seeing a rebound, while others, like business and international travel, may take longer to recover. Employment should continue to rebound over the next few months as the reopening process continues. The job gains we saw in June are encouraging, particularly for workers in the service sector who bore the brunt of lockdowns. But to get back to the pre-pandemic employment rate, we still have more than 500,000 jobs to recoup. Our recent Business Outlook Survey showed that plans to hire staff are widespread as firms prepare for rising demand—but finding workers with the right skills can be difficult and will take time. Comparing the outlook today with our April forecast, we see that growth in the first half of this year is a little weaker than we projected, reflecting both supply chain issues and more protracted containment restrictions in some parts of the country. But looking ahead, we expect a strong rebound in the second half of this year and more sustained growth through 2022 than we previously forecast. We now expect the economy to expand by around 6 percent in 2021— slightly weaker than our April forecast. We have revised up our 2022 forecast for growth to 4½ percent and project 3¼ percent growth in 2023. The Governing Council also discussed the amount of slack in the economy and the outlook for potential growth. Estimates of these measures have always been imprecise but are especially difficult given the rapid changes wrought by the pandemic. In the projection, economic slack is absorbed in the second half of 2022. To help manage the uncertainty surrounding this assessment, we will be watching a broader spectrum of indicators of slack, including a range of labour market measures. The outlook for inflation reflects the dynamics of overall demand and supply in the economy, as well as a number of temporary factors. In recent months, consumer price index inflation has risen above the Bank’s 1 to 3 percent target range. Three major factors are behind this temporary strength, all related to the pandemic. First, gasoline prices rebounded from very low levels a year ago and are now above pre-pandemic levels. Second, other prices that had fallen sharply last year with plummeting demand are now recovering to more normal levels with the reopening of the economy. And third, disrupted global value chains and pandemic-related supply constraints, including shipping bottlenecks and a global shortage of semi-conductors, have pushed up the prices for cars and some other goods. Overall, supply bottlenecks are creating sharper movement in prices that is pushing inflation temporarily higher, and these supply issues now look more important than previously thought. As a result, inflation is now projected to be somewhat above the target band through 2021. But these temporary effects are forecast to dissipate near the end of this year and inflation is forecast to ease back toward 2 percent in 2022. We expect the factors pushing up inflation to be temporary, but their persistence and magnitude are uncertain, and we will be watching them closely. Longer term, given our commitment to hold the policy rate at the effective lower bound until slack is absorbed, the economy is projected to move into modest excess demand, so inflation is slightly above target through 2023 before moving toward target in 2024. In sum, the reopening of the economy and the strong progress on vaccinations have given us reason to be more optimistic about the direction of the economy. But we are not there yet, and we are mindful that the process is likely to be bumpy, and some scars will remain. At today’s decision, the Governing Council judged that the recovery still needs extraordinary support from monetary policy. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. Based on our current projection, this happens sometime in the second half 2/3 BIS central bankers' speeches of 2022. Our quantitative easing (QE) program continues to reinforce this commitment. We decided to adjust the program to a target of $2 billion weekly purchases of Government of Canada bonds, down from a target of $3 billion a week. This adjustment reflects continued progress towards recovery and the Bank’s increased confidence in the strength of the Canadian economic outlook. Decisions regarding further adjustments to the pace of net bond purchases will be guided by the Governing Council’s ongoing assessment of the strength and durability of the recovery. If the economy evolves broadly in line with our outlook, then over time it won’t need as much QE. Further adjustments to our QE program will continue to be gradual, and we will be deliberate both in our assessment of incoming data and in the communication of our analysis. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective. With that, let me stop and turn to you for questions. 3/3 BIS central bankers' speeches
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Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, to the Federation of Quebec Chambers of Commerce (FCCQ), Montreal, Quebec , 9 September 2021.
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Tiff Macklem: Economic progress report - monetary policy for the recovery Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, to the Federation of Quebec Chambers of Commerce (FCCQ), Montreal, Quebec , 9 September 2021. * * * Introduction Thank you for the kind introduction. I am very pleased to be with you virtually in Montréal. My only regret is that I cannot be with you in person. For many of us, it has been a summer of reunions after many difficultmar months apart through this pandemic. I have family in Montréal, and I’m grateful I’ve been able to visit recently, but so far speaking to a room full of people is not possible. I look forward to meeting you in person when we can. In the meantime, please allow me to thank my colleagues at the Bank’s Montréal regional office. In this era of reduced travel, our regional offices across Canada have been instrumental in building our understanding of the economic impact of the pandemic and the challenges we all face. It has been heartening and heart-warming to see the reopening of the Canadian economy over the summer, as the third wave of COVID 19 receded and so many of us got vaccinated. Many of the sectors hit hardest by the pandemic, including tourism and hospitality, finally saw the return of customers after a year and a half of lockdowns. This is real progress, even if the recovery remains choppy and we are still living with the virus and uncertainty about its course. The economic recovery and what it means for monetary policy are what I’d like to focus on today. When the pandemic hit in spring 2020, we provided unprecedented monetary stimulus to support Canadians. We lowered our policy rate to just one quarter of a percent and committed to keeping it there until economic slack is absorbed so that we sustainably achieve our 2 percent inflation target. We also undertook large-scale purchases of Government of Canada bonds, first to help restore market functioning and then to bolster our monetary policy stimulus. This extraordinary program—known as quantitative easing, or QE—helped lower borrowing costs for households, businesses and governments by putting downward pressure on lending rates. Since last October we’ve been gradually reducing the pace of our QE purchases to provide the appropriate amount of stimulus as circumstances evolve. As the recovery progresses, we are moving closer to a time when continuing to add stimulus through QE will no longer be necessary. We are not there yet—and that timing is a monetary policy decision that will depend on economic developments. When we get there, we will stop increasing the size of our holdings of Government of Canada bonds. The monetary stimulus we have injected through our balance sheet will remain, but we will no longer be incrementally adding to it. To keep our holdings of bonds relatively stable, we will need to purchase enough bonds to replace those that are maturing. Essentially, we will be reinvesting the proceeds of maturities, so we call this the reinvestment phase. Today, I want to update you on the evolution of the economy with a focus on developments over the summer. I will also review yesterday’s policy decision. Finally, I want to look ahead to the shift from QE to reinvestment. In particular, I will take the opportunity to fill in some of the details of what this reinvestment phase will look like when we reach it. Afterward, I look forward to taking some questions and hearing your thoughts. Economic update since July 1/5 BIS central bankers' speeches Let’s review economic developments since the July Monetary Policy Report (MPR) because it is progress toward recovery that guides adjustments to our QE purchases. Globally, the economic recovery continued through the second quarter, led by strong US growth. While global economic activity is showing solid momentum heading into the third quarter, supply chain disruptions are holding things back in some goods sectors. These disruptions, and the rising number of COVID-19 cases in many regions, pose a risk to the strength of the global recovery. Here at home, we expected growth to moderate in the second quarter as Canadians grappled with the third wave of the virus. But the slowdown was more pronounced than we anticipated. Economic activity contracted by about 1 percent. The decline in GDP reflected a sharp drop in exports, combined with a pullback in housing activity. But consumption, business investment and government spending all contributed to growth, with total domestic demand growing at more than 3 percent. Growth in the second quarter was affected by disruptions to global supply chains as well as the impact of necessary public health measures. The global shortage of computer chips is affecting automobile production in many countries, including in Canada. This was an important factor contributing to the decline in our exports. And it restrained consumer and business purchases of motor vehicles. Shipping bottlenecks are also leading to longer delivery times and higher prices for some other goods. This is causing households to delay spending on these items. We expect these global supply chain problems will gradually be resolved, but it could take some time. Employment bounced back through June and July as restaurants, stores and high-contact services reopened. A pickup in demand for recreational activities and domestic tourism also supported hiring. With these hard-hit sectors recovering, the unevenness in the labour market is moderating. But considerable slack remains, and some groups are still being disproportionately affected– particularly low-wage workers. Increases in the number of hours people worked in July and higher reported job vacancies both point to continued solid job gains. At the same time, we are hearing from some businesses that the process of finding and hiring workers is proving complicated and time-consuming. And for some companies, this has made it hard for them to keep up with the rebound in demand. We have all seen help wanted signs at restaurants and stores. Achieving full employment is essential to a complete recovery and sustainably achieving our 2 percent inflation target. That’s why it is critical that we understand how Canada’s labour market is recovering. Bank staff are studying this process carefully to help us assess what it means for overall labour market slack.1 Pulling this all together, the Governing Council continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery. Let me turn now to inflation. As you know, we target 2 percent inflation, the middle of a 1 to 3 percent control range. Inflation is above that range now, mostly because of the unique circumstances of the pandemic. COVID-19 and the economic fallout caused the prices for many goods and services to plunge last year. This year’s inflation rate compares prices now with their depressed levels a year ago, making the increase appear more dramatic. In addition, the global supply disruptions I have talked about are leading to higher prices for motor vehicles and other goods. We continue to expect that these factors pushing up inflation will be transitory, but their persistence and magnitude are uncertain and we will be monitoring them closely. We are also watching wages and measures of expected inflation. Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored. Against this background and the considerable excess capacity in the economy, the Governing Council yesterday decided that the recovery continues to require extraordinary monetary policy 2/5 BIS central bankers' speeches support. We maintained our policy rate at its effective lower bound of 25 basis points, and we remain committed to holding it there until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s July projection, this happens in the second half of 2022. The Bank’s QE program continues to reinforce our forward guidance and keep interest rates low across the yield curve. Yesterday, we maintained our QE purchases at a target pace of $2 billion per week. Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery. The reinvestment phase This brings me to the second part of my remarks today—our QE program and monetary policy for the recovery. The economic recovery we have experienced to date has allowed us to gradually reduce the pace of QE purchases from at least $5 billion a week to a target of $2 billion a week. At that pace, we are still adding stimulus—but at a slower rate. When we get to the reinvestment phase, we will adjust the level of our bond purchases to maintain the Bank’s total holdings of Government of Canada bonds roughly stable. And when we arrive at the reinvestment phase, we will communicate this monetary policy decision clearly. Last March, my colleague, Deputy Governor Toni Gravelle, outlined a few important things about the transition to the reinvestment phase. First, the process will be gradual and will proceed in measured steps. Second, the timing of changes to the pace of purchases will be guided by our evolving assessment of the outlook as well as the strength and durability of the recovery. Third, adjusting the pace of bond purchases won’t necessarily mean that we have changed our views about when we need to start raising the policy interest rate. These decisions are distinct. We have tied interest rate decisions to our forward commitment to not raise the policy rate until slack is absorbed so that we sustainably achieve our inflation target. Eventually, when we need to reduce the amount of monetary stimulus, you can expect us to begin by raising our policy interest rate. What this all means is it is reasonable to expect that when we reach the reinvestment phase, we will remain there for a period of time, at least until we raise the policy interest rate. But again, let me emphasize, when we get to the reinvestment phase and how long we are in it are monetary policy decisions that will depend on the strength of the recovery and the evolution of inflation. Let me now say a few words about how we intend to operationalize this reinvestment phase when we get there. To understand that, let’s back up a minute and recap how our balance sheet works. In normal times, the amount of bonds we purchase is driven by our liabilities, not monetary policy considerations. Before QE, our largest liability was the amount of bank notes in circulation. When households and businesses demand more bank notes for their everyday activities, we accommodate this demand, increasing the size of the bank note liability on our balance sheet. To match this liability, we need to hold a corresponding amount of financial assets, and we do this mainly by purchasing Government of Canada securities at auctions in the primary market. At the onset of COVID 19, the demand for bank notes grew more quickly than usual as Canadians withdrew extra cash as a precautionary measure. This greater demand for currency has increased the size of our balance sheet. But by far the largest driver of the increase in our balance sheet was the set of extraordinary liquidity and asset purchase programs we launched when the pandemic hit. Our initial goal was to restore market liquidity and keep credit flowing in the economy. Once market functioning 3/5 BIS central bankers' speeches normalized, we gradually wound down these programs, and many of the assets have since matured and rolled off our balance sheet. The one exception is our Government Bond Purchase Program, or GBPP. Through the GBPP, we bought large amounts of bonds that the government had issued and sold to the private sector. Initially, the GBPP was aimed at restoring market functioning. But as Canada emerged from the first lockdown in summer 2020, we began using this program to provide additional monetary stimulus to support the economic recovery. This is our QE program. Our QE program is implemented by buying Government of Canada bonds held by the private sector in the secondary market in a competitive reverse auction process. As I indicated above, at the height of the COVID 19 shock, we were buying at least $5 billion a week. And as the economy has recovered, we have gradually reduced our purchases to a target of $2 billion a week. When we get to the reinvestment phase, we will want to maintain our total stock of government bonds at a relatively stable level. This will maintain the monetary stimulus we are providing through our balance sheet but not increase it further. To do this, we will reinvest the proceeds of maturing bonds. In general, our purchases during this period will not match the maturities rolling off one-for-one because the maturities are large and unevenly spaced. We will therefore adjust our purchases to match maturities over a longer period, so our purchases are not unduly volatile. We report our balance sheet monthly. Based on the maturity structure of our total holdings of Government of Canada bonds, reinvesting maturing bonds will require purchases ranging around $1 billion a week on average. Given the uneven distribution of our maturities, we will operationalize a target range for purchases of between $4 billion and $5 billion a month. This will encompass both our primary and secondary market purchases. Much of the focus has understandably been on our large-scale secondary market bond purchases associated with QE. But during the reinvestment phase, we will reduce both our primary market purchases at Government of Canada bond auctions and our purchases in the secondary market.2 This will keep our total holdings of Government of Canada bonds roughly stable over time. Our path toward the reinvestment phase has been gradual, and we will continue to proceed in measured steps guided by our evolving assessment of the macroeconomic outlook and the strength and durability of the recovery. Eventually, the reinvestment phase will end, and we will stop purchasing bonds to replace the ones that are maturing, so our holdings of Government of Canada bonds will decline. But as I mentioned above, it is reasonable to expect that when we do eventually need to reduce monetary stimulus, our first move will be to raise the target for the overnight rate—our policy interest rate. Conclusion Let me conclude. The economic recuperation from the pandemic continues to be bumpy and uneven. Progress with vaccinations has allowed many of us to enjoy a return to more normal activities. This is supporting job gains and economic growth, particularly in the sectors that have been hit hardest by the pandemic. And we continue to expect strong growth through the second half of this year. But the virus and pandemic-related disruptions have not gone away, and they will continue to disturb our lives and weigh on economic activity. At the Bank of Canada, we are focused on delivering the best monetary policy for the recovery. Our commitment is to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve our 2 percent inflation target. And you can count on us to continue to be transparent with our analysis and deliberate in our communications. 4/5 BIS central bankers' speeches Thank you. I would like to thank Grahame Johnson and Stéphane Lavoie for their help in preparing this speech. 1 See E. Ens, L. Savoie-Chabot, K. G. See and S. L. Wee, “Assessing Labour Market Slack for Monetary Policy,” Bank of Canada Staff Discussion Paper (forthcoming). 2 Government of Canada bonds can be acquired at primary market auctions or through the secondary market after initial issuances. Secondary market purchases are typically done for policy purposes, including QE. 5/5 BIS central bankers' speeches
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Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, at the Council on Foreign Relations, Washington DC, 7 October 2021.
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Remarks by Tiff Macklem Governor of the Bank of Canada Council on Foreign Relations October 7, 2021 Washington, D.C. (via webcast) The long and short of it: A balanced vision for the international monetary and financial system Introduction Thank you for your kind introduction. I’m very pleased to be here with you, virtually at least. I look forward to the day when we can meet in person again. But the need to invest in international cooperation can’t wait. And I know we’ll have some thoughtful and engaging conversation despite the virtual format. My hope is that we can take inspiration from the cooperation among researchers who developed effective vaccines against COVID-19 in record time. Their efforts and collaboration are saving lives and livelihoods and are underpinning the global economic recovery. This is international cooperation at its very best. Tragically, there hasn’t been nearly as much success in ensuring the equitable global distribution of vaccines, especially to developing countries. This is the biggest health and economic risk facing the world, and—as the G20 highlighted in July—governments and the private sector must work together to make vaccines available to all. While global public health is the most urgent challenge for international cooperation, the international monetary and financial system is one of the most enduring. August marked the 50th anniversary of the end of the Bretton Woods system of fixed exchange rates. Canada exited early, moving to a floating exchange rate in 1970.1 That was a year before the United States suspended convertibility of the US dollar into gold and most major countries floated their exchange rates. This anniversary provides a timely occasion to reflect on the 1 Canada first abandoned the Bretton Woods pegged exchange rate in 1950 but returned to it in 1962. In 1970, Canada left the Bretton Woods system for good. See J. Powell, A History of the Canadian Dollar (Ottawa: Bank of Canada, 2005). I would like to thank Julien Bengui, Gitanjali Kumar, Lori Rennison and Eric Santor for their help in preparing this speech. Not for publication before October 7, 2021 12:00 pm Eastern Time -2international monetary and financial system that has emerged—and how well equipped it is to deal with the challenges ahead. This global system—the exchange rate and capital accounts as well as the institutions and rules that govern them—affects everyone and is critical to our shared prosperity. The investments we have made collectively to strengthen the system have allowed us to clear some hurdles. But we need a system that better balances the immediate imperatives of the short run with the important building blocks for longer-run prosperity. That’s what I want to talk about today. We aspire to an international monetary and financial system that favours inclusive and sustainable growth. In the long run, that is best achieved by a system that promotes economic integration—with free trade, open capital markets and flexible exchange rates. But the current system isn’t there yet, and while we aspire to the long run, we live in the short run. For both these reasons, policy-makers face a delicate balance. Too much confidence that open markets will always deliver economic and financial stability increases the risk of volatile episodes that hurt jobs and growth. But too much focus on managing short-run pressures risks thwarting the medium- to long-run adjustments that are fundamental to productivity and rising standards of living. Finding the right balance between managing short-run pressures and ensuring steady progress toward liberalization is the crucial task of the international monetary and financial system. While much progress has been made in the 50 years since the end of Bretton Woods, achieving this balance remains elusive. And looking ahead, it will not get easier or less critical. As the recovery from the pandemic progresses, and major economies begin to remove exceptional monetary stimulus, the system will likely come under more pressure. Tighter financial conditions globally will suit some countries better than others. And beyond the pandemic recovery, new and even bigger challenges are on the horizon, including climate change, the digitalization of currencies and growing inequality. In my time today, I’d like to talk about Canada’s place in the global monetary and financial system. Then I’d like to highlight some of the challenges the system faces, particularly in the wake of the COVID-19 crisis. Finally, I’d like to outline our vision for the 21st century. Canada and the global monetary and financial system Cross-border economic integration has been a critical source of increased prosperity for Canadians and for citizens the world over. To be effective, the international system needs to deliver stability in prices and allow exchange rate movements that reflect fundamentals. At the same time, it must be able to adjust to shocks and structural changes in a timely way. In Canada, we have longstanding experience with open capital accounts, inflation targeting and flexible exchange rates, and they have served us and a growing number of countries well. Still, weaknesses in the arrangements and policies that make up the international monetary and financial system are long-standing. Over the past two decades, the Bank of Canada has emphasized the need for sound economic and financial -3policy frameworks in advanced and emerging-market economies (EMEs) and sound governance of our global institutions.2 Progress has made the system better able to prevent and manage crises. The International Monetary Fund (IMF) has strengthened its surveillance, enhanced its financing facilities and developed a framework to guide the use of capital controls. Many EMEs have strengthened their policy frameworks, including the wider use of inflation targeting and greater exchange rate flexibility.3 Financial regulation and supervision have been enhanced globally through the implementation of the Basel III reforms. Swap lines and reserve pooling between central banks—two elements of the global financial safety net—have expanded.4 And advanced economies have also become more attuned to the spillovers their policies might cause. This progress has helped the global economy weather the COVID-19 shock. But the crisis has also reminded us of the connectedness and fragility that are inherent in the system. As we all know, massive liquidity interventions by central banks were needed to restore market functioning and support the provision of credit. The interconnections in the global financial system—across countries and between banks and non-bank financial institutions—have brought great benefits. But these interconnections can also propagate and amplify stress. The test we faced together during the COVID-19 shock as well as the challenges that lie ahead underline the need to refocus our attention on where the system should be headed and how we get there. The fallout from the pandemic and the inevitable adjustments ahead as major regions recover at different speeds make dealing with these issues more urgent. Challenges and issues facing the system The current challenges facing our global system can be grouped into two categories: short-run pressures and longer-run challenges. Let me first talk about those short-run issues. EMEs have continued to experience volatility in their financial conditions, despite improvements in fundamentals that have resulted in fewer full-fledged crises. In the last dozen years, episodes of global stress have been all too frequent: the global financial crisis in 2008–09, the taper tantrum in 2013, the sell-off in China 2 See, for example, T. Macklem, “Renewing the IMF: Some Lessons from Modern Central Banking” (speech to the Global Interdependence Center, Philadelphia, March 9, 2006); D. Dodge, “Making Global Economic Institutions Work—What the World Needs Now” (speech to the Chicago Council on Global Affairs, Chicago, May 21, 2007); and M. Carney, “The Paradigm Shifts: Global Imbalances, Policy and Latin America” (speech to the Inter-American Development Bank, Calgary, March 26, 2011). 3 Countries that attempted to fix their exchange rate in the 1990s, and paid the price when their regimes collapsed, have adopted inflation targeting. See A. Rose, “iPhones, iCrises and iTargets: Inflation Targeting Is Eradicating International Financial Crises in the iPhone Era,” CEPR Policy Insight No. 100 (May 2020). 4 Swap lines are agreements between two central banks to exchange currencies, with one of them being a reserve-currency country. Reserve pooling involves access to a shared pool of reserves that countries contribute to. -4in 2015 and the sell-off in emerging markets in 2018. The COVID-19 shock dwarfs these in global scale and reach. In March 2020, capital flew out of EMEs at a historic pace (Chart 1). Chart 1: Portfolio flows to emerging-market economies declined sharply during COVID-19 compared with previous shocks Cumulative daily non-resident portfolio flows to emerging-market economies US$ billion -20 -40 -60 -80 -100 -120 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t + 10 Number of weeks since start of episode Global financial crisis Taper tantrum China sell-off Emerging-market economy sell-off COVID-19 t t+1 t+2 Sources: Institute of International Finance and Bank of Canada calculations Last observation: April 3, 2020 While the situation has since stabilized, capital outflows could happen again when the largest economies start reducing the extraordinary stimulus put in place to deal with the pandemic. To address similar circumstances, EME policy-makers have used a variety of measures, including restricting capital flows and intervening in foreign exchange markets. These policies have gained increased acceptance, and there are circumstances in which they are justified and can be effective in managing shortrun pressures. At the same time, these policy interventions can thwart or delay necessary adjustment in their economies and stunt the development of domestic financial markets and products. For example, the use of capital controls and foreign-exchange interventions—particularly the repeated use of them—can undermine the longer-run development of deep and liquid domestic financial markets. Appropriate guardrails are required to ensure that short-run actions do not get in the way of needed development. Otherwise the short run can become the long run. There is another knock-on effect. Faced with elevated volatility, EMEs are taking out more insurance by accumulating reserves (Chart 2). -5Chart 2: Reserve holdings by emerging-market economies remain high Official reserve assets (including gold) US$ billion 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 China Source: International Monetary Fund International Financial Statistics Emerging-market economies, excluding China Last observation: July 31, 2021 At a minimum, this self insurance looks globally inefficient. And this demand for reserves is contributing to a shortage of reserve assets, which may be reinforcing the decline in the neutral rate of interest. This in turn raises the risk of liquidity traps and can lead to the buildup of financial vulnerabilities everywhere. Turning to longer-run challenges, there are several. The first involves the welcome evolution of countries from frontier to emerging to advanced economies. As these economies grow and increase in importance, their integration into the international monetary and financial system will become more pressing. Early on, they may not have a well regulated and stable domestic financial sector, or open trade and capital markets that promote economic integration. The international community needs to develop and invest in a clear long-run strategy to assist with the smooth integration of these countries into the global system and to encourage them to adopt the rules that guide this system. A second longer-run challenge is the choice of exchange rate regime. We’ve seen how a freely floating exchange rate may lead to excess volatility in response to short-run disturbances. But to accommodate longer-run structural changes that are essential for sustained development, some margin of flexibility is needed. If nominal exchange rates remain fixed, then domestic prices and wages have to adjust, and this can be protracted and painful. In particular, if domestic prices and wages need to fall, this is likely to require an extended period of weak demand and high unemployment. In the medium run, the real exchange rate moves and the system adjusts, but the cost of forcing the adjustment through all wages and prices can be steep. Worse still, if that adjustment is also hampered by capital controls, external imbalances are likely to persist and build. And if, as a result, the currency peg becomes unsustainable, the country is likely to face an abrupt adjustment, and the effects are often felt by the entire system. Vision and agenda for the 21st century As we consider these challenges together, the right balance is crucial. We need a vision for the international monetary and financial system of the 21st century in which EMEs will form an increasing share of the global economy, while gradually developing their financial systems. This vision for the long run cannot merely focus on a utopian system where all participants have mature, well-regulated financial systems, fully open capital accounts and exchange rates that are freely floating. We must also be mindful that some are closer to the destination than others. In discussing this vision, I want to focus on three priorities: the need to find balance between short-run policies and long-run progress, the value of a framework for currency intervention, and the need for global cooperation and resources. Over the past decade, the focus has been on widening the set of policies countries use to deal with temporary external shocks. This is welcome and is reflected in the IMF’s Institutional View. But there has not been enough attention to ensuring that these policies do not impede longer-run progress. Many EMEs seem to be settling for intermediate exchange rate regimes with more or less regular foreign exchange interventions. This risks slowing needed structural adjustments in the real economy. It also risks exacerbating the very pressures these short-run tools seek to manage. By thwarting adjustment, they can cause pressures to build up, leading to greater volatility. Finding balance means allowing countries to respond to excess volatility or disruptions in the short run while making the system flexible enough to adjust in the long run. Progress has been made in the IMF’s Institutional View, which supports the use of macroprudential policy to manage financial stability risks. And only if macroprudential measures are insufficient, should capital flow management be considered. But more work is required to understand the implication of short-run policies for longer-run financial development. Currency intervention needs attention as well. A freely floating currency may not provide as much benefit to some EMEs as once thought. Dominant currency pricing reduces the benefits of exchange rate adjustment for some countries, and currency mismatches on balance sheets increase the costs.5 But the system needs guardrails to make sure currency intervention does not get in the way of needed relative price adjustments. At the Bank, we would like to see the development of a framework for exchange rate management similar to that in the IMF’s Institutional View for capital flow management. Such an agreed-upon framework could guide managed floating exchange rate regimes to make sure they do not stall adjustment in the medium to long run. The focus here should be on a coherence between the choice of exchange rate regime and other policies. In the end, policy-makers need to recognize that capital account and currency interventions should be targeted to address specific concerns, and these 5 The US dollar has become the dominant currency in pricing many goods that countries trade. Consequently, exchange rate movements may affect the price of imports relative to domestic goods, but they may not immediately affect the price of exports relative to foreign goods. This, in turn, would reduce the role of exchange rate movements in facilitating adjustment. -7interventions should be temporary. Over the longer run, countries should plan to rely less on these policies as their financial systems mature. In the shorter run, every time these interventions are used, a clear exit plan should be in place. And the circumstances under which interventions may occur should be well defined, so that an exit can be facilitated when conditions are no longer met. Global cooperation and resources are also required to agree on a long-run vision for the international system. Considerable resources have been devoted to the management of short-term liquidity and volatility issues, and that has been necessary and important. Global policy-makers need to balance this effort with greater focus and resources to promote longer-term economic and financial development. The IMF’s multilateral role in surveillance is essential—the global system needs to be managed as a system. And the Financial Stability Board is doing valuable work with peer review and assessments to strengthen adherence to international standards. My hope is that we can build on these elements to deepen the engagement of systemically important economies on an international monetary and financial system that maximizes the benefits of economic and financial integration. In Canada’s experience, the destination is one with open capital markets, robust and transparent policy frameworks—including monetary, fiscal and macroprudential policies—and enough exchange rate flexibility to promote the timely and symmetric adjustment to shocks. Effective and legitimate multilateral institutions are essential to this destination. To this end, continuing efforts to improve the governance of these institutions are important. This includes ensuring that IMF members are properly represented in their quota shares and there are transparent and clear roles and responsibilities for each level of decision-maker at the IMF. Conclusion Let me conclude here, so that we have enough time for a good discussion. I want to leave you with a sense of urgency and purpose. The pandemic and the looming challenges ahead, including climate change and digital currencies, make it more important than ever that the international monetary and financial system evolves. We need a clear long-run destination that everyone is committed to and a framework to manage short-run challenges in a way that doesn’t derail us from that ultimate destination. What we need is an international monetary and financial system that can handle—even facilitate—the transitions to come, including the exit from exceptional monetary policy, the transition to net zero emissions and the potential digitalization of the international monetary system. I look forward to discussing all of these issues with you. Thank you.
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 27 October 2021.
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Tiff Macklem: Release of the Monetary Policy Report Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 27 October 2021. * * * Good morning. I’m pleased to be here with you—in person—to discuss today’s policy announcement and the Bank’s Monetary Policy Report (MPR). It seems fitting that we are back together in this somewhat normal setting as we conclude one part of our extraordinary monetary policy response to this pandemic. This morning we announced that we are ending quantitative easing (QE) after more than year and a half. We undertook QE first to help restore market functioning and then to boost our monetary policy stimulus. Since last October, in line with progress in Canada’s economic recovery, we have been gradually reducing the pace of our QE purchases. With the economy once again growing robustly, Governing Council judged that QE is no longer needed. This means we will stop growing our holdings of Government of Canada bonds. It is important, however, to remind Canadians that the significant stimulus we have injected through QE remains in place. We just won’t be adding to it. We call this the reinvestment phase. In this phase, we will purchase bonds only to replace those that are maturing so that our overall holdings of Government of Canada bonds remain roughly stable over time. The end of QE comes as increasing vaccination rates are enabling continued progress in the economic recovery in Canada and around the world. While new complications of reopening continue to crop up and that is boosting the prices of many globally traded goods, I’m struck by how much progress our economy has made since the start of the crisis. We’ve come a long way. And our forecast is for an increasingly healthy economy, even if these complications are going to be with us for a while longer. We are forecasting annual growth in economic activity will be around 5 percent this year, and about 4¼ percent in 2022 and 3¾ percent in 2023. Global supply chain disruptions and shipping bottlenecks are expected to restrain growth and boost prices into next year. So relative to our forecast in July, growth in Canada is a little lower and inflation takes longer to come back down. The main forces pushing up prices—higher energy prices and supply bottlenecks—now appear stronger and more persistent than we previously thought. Let me expand on these themes and say a few words about the key points of the Governing Council’s deliberations. Of course, we discussed the evolution of COVID-19. While vaccination rates are generally very high in Canada and the number of cases in most regions has declined, the pandemic continues to disrupt our lives. Some of the disruptions were expected—we’ve never closed and reopened the economy before, so it was bound to be bumpy. But others, including labour-market frictions and supply disruptions, are more pronounced than anticipated. Let me talk about each of these in turn. We’ve seen strong job growth in recent months. Many sectors that were hardest hit by lockdowns earlier in the pandemic rebounded strongly as Canadians resumed more normal activities. Strong job growth has reduced the very uneven impacts of the pandemic, particularly for youth and women. However, the recovery of low-wage jobs continues to lag, many people are not working as many hours as they would like, and the large number of people who have been unemployed for more than six months remains a concern. 1/3 BIS central bankers' speeches Slack remains in the labour market. But even as the unemployment rate remains well above prepandemic levels, job vacancies have risen sharply. This is unusual. Our recent Business Outlook Survey indicates that labour shortages have intensified in two areas. The first is shortages of skilled trades and digital workers. This is a challenge that existed before the pandemic as well. The second is more pandemic-specific. As service businesses like restaurants and stores reopened this summer, many had trouble hiring workers quickly enough to meet the surge in demand. Part of this reflects the reality that it simply takes time for companies to find workers with the right skills, and for workers to find the right jobs. Repeated closures in some sectors and the challenges of working in high-contact jobs during a pandemic may also be affecting the workforce. About half of the unemployed workers who responded to the recent Canadian Survey of Consumer Expectations said they’re considering a move to a different industry. With lots of Canadians still looking for work, and many employers hiring, we expect employment growth to continue in the months ahead. But the process of matching workers and jobs is more difficult than in a typical recovery, and it could take some time to work through these issues. Governing Council also spent time discussing supply chain disruptions. The global shortage of semiconductors and other manufacturing inputs, as well as shipping and other transportation bottlenecks, are affecting production and delaying deliveries of many goods. While we highlighted some of these problems in our July MPR, they are more widespread and look to be more persistent than we anticipated. Quantifying the impact of these supply factors is difficult, but the implication is that there is likely less excess supply in the economy than we thought there would be. We now expect the output gap to close sometime in the middle quarters of 2022, which is earlier than we projected in July. Let me underline there is more uncertainty than normal around the economy’s productive capacity due to the unusual circumstances of the pandemic. The combination of on-going supply disruptions and related cost pressures, as well as higher energy prices, is putting upward pressure on many prices around the world. In Canada, inflation is currently running at about 4½ percent. We now expect it will rise to close to 5 percent by the end of this year, before coming back down to around the 2 percent target by the end of next year. In other words, we continue to expect that inflation will ease back, but relative to our July forecast, it is higher for longer. We know higher prices are challenging for Canadians, making it harder for them to cover their bills. I want to assure you that inflation is not going to stay as high as it is today, even if it is going to take somewhat longer to come down. The Bank of Canada is committed to ensuring that price increases don’t become ongoing inflation. So far, measures of medium- to longer-term inflation expectations remain well anchored on the 2 percent target, and overall wage pressures remain moderate. This suggests that higher prices are not becoming embedded in expectations of ongoing inflation. As these forces play out, it is our job to bring inflation back to target, and I can assure you we will do that. In view of the continued excess capacity in the economy, my fellow Governing Council members and I judged that the economy still needs considerable monetary policy support. While we ended QE, we kept our policy interest rate at its lowest level, and reaffirmed our commitment to keep it there until slack in the economy is absorbed so that the 2 percent inflation target is sustainably achieved. Based on our current projection, this happens sometime in the middle quarters of 2022. Let me conclude with some additional information on the end of QE and the shift to reinvestment. Following the announcement of our decision this morning, we issued a market notice outlining in detail the changes to our market operations. Because bond maturities are lumpy, we are moving to a monthly rather than a weekly target range for our purchases. That target range will be $4 billion to $5 billion per month. This includes our purchases in both the primary and secondary 2/3 BIS central bankers' speeches markets. As outlined in the market notice, to keep our holdings of Government of Canada bonds roughly stable, we plan to purchase roughly $1 billion to $2 billion per month in the primary market, and roughly $2½ billion to 3½ billion per month in the secondary market. How long the reinvestment phase lasts is a future monetary policy decision. It will depend on the strength of the recovery and the evolution of inflation. But as I indicated in September, it is reasonable to expect that we will be there for a period of time, at least until we raise our policy interest rate. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target. With that, let me stop and turn to you for questions. 3/3 BIS central bankers' speeches
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Remarks (delivered virtually) by Mr Lawrence Schembri, Deputy Governor of the Bank of Canada, to the Canadian Association for Business Economics, 16 November 2021.
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Remarks (delivered virtually) by Mr Paul Beaudry, Deputy Governor of the Bank of Canada, at the Ontario Securities Commission (OSC) Dialogue, Toronto, Ontario, 23 November 2021.
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Opening statement (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, before the Symposium on Indigenous economies, Ottawa, Ontario, 29 November 2021.
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Tiff Macklem: Opening statement - Symposium on Indigenous economies Opening statement (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, before the Symposium on Indigenous economies, Ottawa, Ontario, 29 November 2021. * * * Hello and welcome. I want to extend my deepest thanks to Elder Commanda for offering her blessing to launch this important event. I hope we draw on the spirit of reflection embodied in this blessing throughout this symposium and beyond. I also want to thank Sarah, Ngarimu and Suzette for their meaningful land acknowledgements. These acknowledgements are a vital part of our collective efforts toward reconciliation. They reflect much more than a historical accounting of the original occupants of this land. They commemorate not only Indigenous peoples’ rich contributions to our countries, but also their kinship to Mother Earth and her life-sustaining gifts. And importantly, land acknowledgements help us all reflect on the history that brought us to reside here. Why we’re here This is one of the main goals of the Central Bank Network for Indigenous Inclusion—to recognize the shared history of colonialism in our countries, and to work together to acknowledge and address some historical wrongs. This symposium is key to our common objectives. And I want to thank two people who have been key to making it all happen. First, I want to thank Manny Jules, Chief Commissioner of the First Nations Tax Commission and founder of the Tulo Centre of Indigenous Economics. He has been the inspiration behind much of the Bank’s work in this sphere, and a leader in helping to bring this event to fruition. I’d also like to express my gratitude to the Reserve Bank of New Zealand and Governor Adrian Orr for being an inspiration to us in how you’re building closer partnerships with Māori. We all have a lot to learn from our combined experiences, and we look forward to collaborating more on this in the future. Over the next two days, we’ll take a historical look at Indigenous economies, and we’ll consider various aspects of present-day economies. This includes access to capital, resource development, and Indigenous businesses and labour markets. We’ll also talk about the impacts that policies throughout history have had on current-day inequalities. I expect we will have moments of hope and moments of inspiration. We will also have uncomfortable moments of coming to terms with shameful parts of our history. Our nations have all travelled different paths in our colonial histories. And each country represented here faces unique realities in their relationship with Indigenous communities today. But this symposium reflects our shared desire to work together internationally and within our countries—and most importantly, with Indigenous partners—to learn from our histories and to do better. 1/3 BIS central bankers' speeches Our commitment to reconciliation Here in Canada, governments across the country and Canadians from coast to coast to coast have vowed to uncover historical truths and work toward reconciliation. We can’t go back and change what’s happened. But we can try to correct some of the consequences that arose from ugly periods in our past. To this end, we have committed as a country to advance reconciliation and renew our relationship with Indigenous peoples, based on recognition of rights, as well as respect, cooperation and partnership. Much of the work is being done through the lens of the Truth and Reconciliation Commission’s final report that was released six years ago with 94 calls to action. Part of this includes economic reconciliation, which relates to our mandate as Canada’s central bank. Fundamentally, it’s our job to promote the economic and financial welfare of our country and all peoples within it. The report encourages organizations to apply reconciliation principles, norms and standards to their policies and operational activities. This speaks directly to one of the goals shared by all of us at this symposium: making our workplaces and policies more inclusive. That means eliminating long-standing barriers and ensuring that all voices are heard. Because when we listen to more diverse voices, we have a greater understanding of how our policies affect all Canadians. This helps us make better decisions. The report also calls for meaningful consultations with Indigenous peoples and communities on economic development and equitable access to jobs, training and education. As Canada’s central bank, we play an important role in creating the conditions for opportunity for Canadians. And this must include meaningful opportunities for Indigenous peoples within Canada. So, taking concrete steps toward economic reconciliation is our responsibility too. And it’s incumbent upon us to take the time to do this well. Moving forward With this in mind, the Bank of Canada will be working with a broad spectrum of Indigenous groups to set out what reconciliation means for what we do. This will be a thoughtful, intentional exercise. We will look to our existing partners—and hopefully, many new ones—to guide us toward a common understanding of what our role should be going forward. We’ve learned a lot from the relationships we’ve built over the past several years. And we’ve made positive steps forward—here I’m thinking about joint initiatives we’ve taken with Indigenous partners to identify barriers to economic inclusion, and some education and capacity building we’ve embarked upon together. Now it’s time to broaden our engagement and reflect on what we can and should do. We know we have more to learn. And we know that there are many other voices that need to be heard— including those of you gathering with us today and tomorrow. So we’ll take the best of the growth and learnings from our recent efforts. And we’ll ask our partners to walk alongside us as we take the next steps in our journey. Together, we’ll define what reconciliation means for the work of the Bank of Canada—toward a more inclusive and prosperous economy for everyone. Conclusion 2/3 BIS central bankers' speeches As I wrap up my remarks, I want to leave you with some inspiration to guide us over the next two days. And I can’t say it any better than this quote from Elder Commanda’s grandfather, William— who was also an Elder. He said: “We must come together with one heart, one mind, one love and one determination.” I invite you to keep this vision top of mind as we work together to reshape our relationship with Indigenous peoples and foster inclusive growth and prosperity. We have much to learn from each other. I am grateful to all our presenters, discussants and participants. And I am confident that, guided by your insight and wisdom as well as the collective spirit of collaboration, this gathering will be an important building block toward better understanding, better operations and better policies. 3/3 BIS central bankers' speeches
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Remarks (delivered virtually) by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, to the Surrey Board of Trade, Surrey, British Columbia, 9 December 2021.
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Toni Gravelle: Economic progress report - a recovery unlike any other Remarks (delivered virtually) by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, to the Surrey Board of Trade, Surrey, British Columbia, 9 December 2021. * * * I would like to thank Brigitte Desroches and Michael Francis for their help in preparing this speech Good afternoon. It is a pleasure to be with you virtually today. Thank you, Anita, for that kind introduction, and thank you to all members of the Surrey Board of Trade for welcoming me. My heart goes out to those affected by the recent floods that have been devastating for so many British Columbians. Canada’s economy has come a long way since the pandemic struck in spring 2020. With high vaccination rates and a broad reopening of the economy, we are well down the road to a full recovery. But we are still feeling the impacts of the pandemic. We have never shut down and reopened an economy before, which makes this recovery unique and complex. The global supply disruptions and related price increases we are experiencing reflect the broader economic forces triggered by the shutdown and reopening of the economy. Today, I will provide an update on the economy’s progress since our most recent Monetary Policy Report (MPR) in October. I will focus on two issues that are top of mind for many Canadians: supply shortages and the current elevated rate of inflation. In our last MPR, we discussed the three main drivers of inflation. First, we said about one-third of the high inflation we’re experiencing is due to higher energy prices. Second, the rebound in demand for hard-to-distance services is pushing their prices higher. Finally, the supply constraints have increased the prices of many components of the CPI basket, most of them tied to goods. I will elaborate on this last driver and discuss why we believe inflation will ease over time as supply catches up. I will also talk about how the two issues I mentioned earlier factored into our interest rate decision yesterday. Specifically, I’ll explain how the Bank of Canada assesses the risks to our forecast for inflation and how we adjust our forecast when those risks materialize. Supply constraints I don’t think I’m exaggerating when I say most of us have had a recent experience with supply chain disruptions. Whether you have been looking to buy a car or a dishwasher, or are shopping for family ahead of the holidays, the reality is that some goods are not available and wait times are longer. These supply shortages aren’t just affecting Canada; they are a global phenomenon largely related to the unique circumstances of the pandemic. Strong demand for goods, combined with multiple supply shocks, is feeding through to business costs and resulting in higher prices. Let me talk about how demand interacted with supply constraints before I turn to the impact it has had on prices. Simply put, the pandemic threw the global economy into a series of successive lockdowns and other health measures, which disproportionately impacted hard-to-distance services. These pandemic closures also significantly altered household consumption patterns. During the pandemic, people spent more on goods such as groceries and household appliances and less 1/5 BIS central bankers' speeches on services.1 After the initial wave of the pandemic, spending on goods recovered much more quickly than spending on services. Spending on goods had more than fully recovered by the third quarter of 2020, to roughly 5 percent above its pre-pandemic level. This rapid rebound in goods consumption was underpinned by fiscal and monetary policy. Government support programs and ultra-low interest rates kept many workers employed and kept access to credit and buying power intact. While consumption of services started to recover around the same time, it remained roughly 12 percent below its pre-pandemic level through to the beginning of 2021. Only recently have we seen a meaningful increase in services consumption, but it is still 4 percent below where it was before the pandemic. An important consequence of this shift in consumption patterns, observed in most advanced economies, is that it put extraordinary strain on global shipping networks. Since so many goods and their components are traded, the demand for shipping containers to carry them increased; ports, rail and trucking services came under pressure; transportation costs rose; and shipping delays intensified. These bottlenecks and delays were amplified because many businesses responded to shortages by ordering their inputs not only earlier, but also in greater quantities. With demand stronger than what would be expected under normal business conditions, this so-called bullwhip effect further exacerbated supply strains. The impact of these bottlenecks has fed through to a wide range of manufacturers that depend on imported parts and materials. Firms couldn’t secure key inputs in a timely manner, and many slowed or even stopped production, causing additional backlogs, supply constraints and delays. Canadian manufacturers saw their suppliers’ delivery times lengthen to near-record levels by November. On top of those related to the pandemic, we’ve seen other disruptions to supply, such as bad weather affecting crop harvests in many parts of the world, including the harvests of our western grain farmers. Labour shortages are also contributing to the supply shock. In addition to pre-pandemic shortages of highly skilled workers, we have also faced elevated vacancy rates for jobs in the service sector. It takes time for companies to find workers with the right skills and for workers to find the right jobs. This demand-supply imbalance has resulted in higher inflation. Many components of the CPI basket have been subject to supply constraints, most of them tied to goods. The average inflation rate of goods in 2021 has been 4.4 percent, much higher than that of services at 2.1 percent. This is in sharp contrast to historical trends, whereby services have typically experienced higher inflation than goods. In the 20 years before the pandemic, goods inflation was only 1.4 percent on average and inflation for services was 2.4 percent. We expect supply disruptions to unwind over time. Bottlenecks will be resolved, so supply should catch up. At the same time, we anticipate some companies will be motivated to add to their capacity to meet demand over time—by expanding their factories, investing in new technologies and automation, and hiring more workers. Others may adapt by modifying their products to get around shortages and reduce high input costs.2 Logistics companies will also add shipping capacity. Consumers can also be expected to resume spending a more typical share of their income on services. This was evident recently, with a sharp increase in spending on hard-to-distance services in the third quarter. Consumers may also shift away from products that are not available to those that are, which would lower demand for goods in short supply. 2/5 BIS central bankers' speeches However, this risk that supply disruptions persist longer than we expect figured prominently in our deliberations leading up to yesterday’s policy decision. So, I’ll turn to how we have been assessing this risk and how we adjust our forecast when a risk materializes. Risks to our outlook and adjusting to incoming data Given the unprecedented nature of the pandemic and the uniqueness of the recovery, evaluating the risks to our outlook has taken on more importance. Central banks must assess where the economy and inflation are heading, since monetary policy actions take time to flow through the economy and achieve their desired result. Nonetheless, even in normal times, there is always a degree of uncertainty when measuring economic activity as well as gauging underlying inflationary pressures related to the output gap and other factors. Our models provide a valuable framework upon which to build our forecast, but they reflect historical economic trends and cycles and can’t capture all economic realities. Given that there is no historical precedent to the sudden closing and reopening of the economy, our models were not built to capture the many economic forces that arose from the pandemic. We routinely list key risks to our inflation outlook in the MPR to help people understand the factors that could affect inflation and the uncertainty around the outlook. We examine incoming data to help us update our assessment of whether a risk is materializing, and then we update our baseline forecast accordingly—taking on board all or part of that materialized risk or removing it if it’s no longer a factor. At the beginning of the year, we saw evidence of semiconductor shortages affecting the production and sales of motor vehicles. The production of motor vehicles and parts fell by close to 15 percent during the first half of the year. Additional supply constraints started to become apparent as COVID-19 outbreaks further disrupted production of other goods in some countries. From there, evidence of transportation bottlenecks mounted with ocean shipping costs and port delays climbing in the spring. Then challenges sourcing parts started affecting exports, investment and inventories. What had begun as a narrow set of supply constraints, largely centred on vehicles, started to grow and come together into a generalized supply shock that interacted in myriad ways with robust demand for goods. It became more apparent over the summer that the situation had evolved considerably, and supply constraints had become much more prevalent. Supply chain disruptions suggested a significant, negative impact on productive capacity. Firms we spoke to in our Business Outlook Survey leading up to our October decision said that supply chain disruptions were more prevalent and had worsened since earlier in the year. These businesses also expected the disruptions to persist into the second half of 2022. An unusually large portion of respondents said they would have difficulty meeting an unexpected increase in demand, with roughly one-third of firms mentioning the supply chain as a bottleneck, up from less than 10 percent before the pandemic. We took this information on board in our October forecast and drew heavily on our past experience to guide our assumptions about the magnitude and persistence of the effects of supply disruptions on economic activity and inflation.3 Overall, our analysis suggested the supply factors were holding back productive capacity by more than their impact on demand, suggesting the output gap was likely narrower than projected in July. The pandemic’s unusual nature makes it hard to pinpoint when the impact of these supply disruptions will peak. In October, we estimated that this would happen sometime toward the end of 2021, before gradually dissipating over 2022. But gauging how quickly supply issues will be resolved—and hence how much productive capacity exists compared with demand—is difficult. 3/5 BIS central bankers' speeches As a result, we are looking at a wide range of data, including labour market indicators, to assess the amount of slack in the economy, and our decisions will increasingly depend on how these data evolve. Our decision yesterday So where do things stand now? Let me first turn to some good news. Last week’s Labour Force Survey provided a very strong indication that Canada’s job market has largely recovered in most sectors. Workers have rejoined the workforce, notably in the service sector, and companies have hired to meet demand. On top of this, job vacancies across the country are near record highs. Moreover, since our most recent report in October, economic data continue to show a rebound in activity associated with reopening the economy. Third-quarter GDP data showed impressive consumption-led growth of 5.4 percent—in line with our October forecast. That said, the level of GDP was still about 1½ percent below where it was at the end of 2019 before the pandemic began. And the flooding in British Columbia is likely to temporarily weigh on growth in the fourth quarter. However, in terms of supply constraints and inflation dynamics, the picture remains mixed. While there are early signs that some supply constraints are easing, such as for semiconductors, most constraints remain largely unresolved. Moreover, as Governing Council noted in this week’s policy discussions, the floods in British Columbia are likely to worsen backlogs at the Port of Vancouver and disrupt shipping by rail and truck. Then there is the Omicron variant. We expect to learn more about how this will impact public health and the economy in the weeks to come. Hopefully, Omicron will turn out not to be too serious, but there is a risk that it could hold back services consumption. In terms of Omicron’s effects on inflation, the new variant has triggered a sharp drop in oil prices in the near term. But further out, given its potential to restrain the transition to more balanced consumption patterns between goods and services, it could exacerbate upward price pressure on the goods that are experiencing supply constraints. This only serves to reinforce my earlier point that gauging how quickly supply issues will be resolved—and hence how much productive capacity exists compared with demand—is challenging. The degree of excess supply and demand varies across sectors, which means our typical measure of slack comes with a higher degree of uncertainty. Supply chain disruptions and related cost pressures continue to be an important upside risk to our inflation forecast. Our current view remains that we should see elevated inflation subside in the second half of next year. However, we will conduct a full assessment of this risk in January when we update our projection for the economy and inflation. And that’s why yesterday we maintained the policy interest rate at the effective lower bound of 1/4 percent and maintained the Bank’s extraordinary forward guidance. Governing Council judges that in view of ongoing excess capacity, the economy continues to require considerable monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s October projection, this happens sometime in the middle quarters of 2022. We will provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target. Conclusion 4/5 BIS central bankers' speeches There is much to be hopeful for as we move closer to a full recovery. Many public health restrictions have been lifted, although new variants remain a cause for concern. People are getting back to work, and companies are investing to meet growing demand. Nevertheless, the unique circumstances of this recovery present important challenges. With CPI inflation considerably above our target range of 1 to 3 percent, the materialization of upside risks is of greater concern. If supply disruptions and related cost pressures persist for longer than expected and strong goods demand continues, this would increase the likelihood of inflation remaining above our control range. This could feed into inflation expectations and contribute to wage pressures, leading to a second round of price increases. However, medium- to long-term inflation expectations remain well anchored. Meanwhile, wage increases have picked up, but to pre-pandemic levels. From the early days of the pandemic to more recently, as our economic recovery has progressed, we have adjusted monetary policy to provide the appropriate amount of stimulus the economy has needed. In early November, we ended our quantitative easing program. With the economy once again growing robustly, we judged that this extra layer of stimulus was no longer required. While we expect inflation to ease in the second half of next year, we are closely watching inflation expectations and labour costs to ensure that the forces pushing up prices do not become embedded in ongoing inflation. Rest assured that the Bank of Canada remains resolute in its commitment to keep inflation under control. Thank you. 1 Evidence of changes in spending patterns for Canadians is discussed in the Canadian Survey of Consumer Expectations—First Quarter of 2021 and in recent research by Bank staff. See K. Huynh, H. Lao, P. Sabourin and A. Welte, “What Do High-Frequency Expenditure Network Data Reveal about Spending and Inflation During COVID 19?” Bank of Canada Staff Analytical Note No. 2020-20 (September 2020). 2 To adapt to the shortage in semiconductor chips, some vehicle manufacturers are reducing various chip- intensive features available in new vehicles, including hands-free technology, heated seats and USB ports. 3 For example, past disruptions to motor vehicle production help us understand the current disturbances in the auto sector arising from the semiconductor shortage. They also help us to forecast the overall impact on the broader economy. 5/5 BIS central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference on the renewal of the monetary policy framework, Ottawa, Ontario, 13 December 2021.
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Tiff Macklem: Renewal of the Monetary Policy Framework Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference on the renewal of the monetary policy framework, Ottawa, Ontario, 13 December 2021. * * * The objective of Canada's monetary policy is to promote the economic and financial well-being of Canadians. Experience has shown that the best way monetary policy can achieve this goal is by maintaining a low and stable inflation environment. Doing so supports a strong and inclusive labour market that provides every Canadian with opportunities for a good quality of life. Currently, the reopening of the global economy is associated with elevated inflation in Canada and abroad. While this is a global phenomenon, it makes maintaining a sound framework for monetary policy in Canada all the more important. From a longer-term perspective, since the adoption of an inflation-targeting framework 30 years ago, consumer price index (CPI) inflation has averaged close to 2 percent, despite periods of both upward and downward pressures on inflation. The maintenance of low, stable and predictable inflation has also contributed to Canada’s strong labour market performance. In the current context, Canada’s inflation-targeting framework helps to ensure that inflation will return to 2 percent over the medium term. The Government of Canada and the Bank of Canada believe that the best contribution of monetary policy to the well-being of Canadians is to continue to focus on price stability. The Government and the Bank also agree that monetary policy should continue to support maximum sustainable employment, recognizing that maximum sustainable employment is not directly measurable and is determined largely by non-monetary factors that can change through time. Further, the Government and the Bank agree that because well-anchored inflation expectations are critical to achieving both price stability and maximum sustainable employment, the primary objective of monetary policy is to maintain low, stable inflation over time. This renewal of Canada’s monetary policy framework is occurring at a time when changes to the economy are complicating the task of monetary policy. The global financial crisis and COVID-19 pandemic have had a significant impact on the global economy and financial system, and major trends such as shifting demographics and new digital technologies are altering the economic landscape. Climate change and the long-term transition to net-zero greenhouse gas emissions will drive structural change in the Canadian and global economies. Also, there is now greater recognition, supported by economic research, that when the benefits of economic growth and opportunity are more evenly shared, it leads to more prosperity for the whole economy. A strong and inclusive labour market helps reduce income inequality and supports robust demand for goods and services. Monetary policy is well equipped to address some of these challenges, less so for others. Two developments are particularly salient to the conduct of monetary policy: Neutral interest rates are likely to be lower than in the past, which means that central banks will have less room to lower their policy interest rates in the face of large adverse shocks to the economy. Major forces, including demographics, technological change, globalization, and shifts in the nature of work, are having profound effects on the Canadian labour market. These evolving forces have increased uncertainty about the level of maximum sustainable employment (i.e., the level of employment beyond which inflationary pressures arise). 1/2 BIS central bankers' speeches Consequently, the Government of Canada and the Bank of Canada agree to renew the inflation target on the following basis: The target will continue to be defined in terms of the 12-month rate of change in the total CPI. The inflation target will continue to be the 2 percent mid-point of the 1 to 3 percent inflationcontrol range. The agreement will run for another five-year period, ending December 31, 2026. The Government and the Bank further note that: Given that there is uncertainty about the maximum level of employment that is consistent with price stability, the Bank will continue to use the flexibility of the 1 to 3 percent control range to actively seek the maximum sustainable level of employment when conditions warrant. The Bank will consider a broad range of labour market indicators and will systematically report to Canadians on how labour market outcomes have factored into its monetary policy decisions. The Bank will also continue to leverage the flexibility of the 1 to 3 percent range to help address the challenges of structurally low interest rates by using a broad set of tools, including sometimes holding its policy interest rate at a low level for longer than usual. The Bank will utilize the flexibility of the 1 to 3 percent range only to an extent that is consistent with keeping medium-term inflation expectations well anchored at 2 percent. The Bank will explain when it is using the flexibility in the framework. The Government and the Bank acknowledge that a low interest rate environment can be more prone to financial imbalances. In this context, the Government will continue to work with all relevant federal agencies to ensure that Canadian arrangements for financial regulation and supervision are fit-for-purpose and consider changes if and where appropriate. Additionally, while monetary policy cannot directly tackle the threats posed by climate change, the Bank will develop the modelling tools needed to take into account the important implications of climate change on the Canadian economy and financial system. Finally, recognizing the limits of monetary policy, the Government and the Bank also acknowledge their joint responsibility for achieving the inflation target and promoting maximum sustainable employment. 2/2 BIS central bankers' speeches
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Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, to the Empire Club of Canada, Toronto, Ontario, 15 December 2021.
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Remarks by Tiff Macklem Governor of the Bank of Canada Empire Club of Canada December 15, 2021 Toronto, Ontario (delivered virtually) Our monetary policy framework: Continuity, clarity and commitment Introduction Good afternoon and thank you for the kind introduction. It’s always a pleasure to speak to the Empire Club. The last time I was with you was in March 2020, and I was the Dean of the Rotman School of Management. I spoke about the economic impact of COVID-19—when we were just a few weeks into it. What a long journey it has been for everyone. Today, I am pleased to have the opportunity to talk with you about Canada’s monetary policy framework. Every five years the Government of Canada and the Bank of Canada review and renew the monetary policy framework. Two days ago, the Minister of Finance and I announced the renewed agreement. This important framework provides continuity and clarity and reaffirms our commitment to flexible inflation targeting. The flexible inflation-targeting framework we’ve had in place for the past three decades has served us very well. It has delivered low, stable and predictable inflation. This has contributed to a more stable economic environment, so households and businesses can make spending and investment decisions with confidence. It has supported sustained growth in output, employment and productivity, and it has contributed to rising standards of living. When we consulted Canadians as part of our review, they told us they value low and stable inflation. And our expert analysis found that it is hard to do better than flexible inflation targeting. Our framework has also proven to be adaptable and resilient through economic change and crisis. The COVID-19 pandemic has illustrated the value of a clear and well-understood inflation target. Even as the complications of reopening the global economy have caused inflation in Canada and many other countries to rise, medium and longer-term inflation expectations in Canada have remained well anchored on our inflation target. Keeping inflation expectations well anchored is key to completing the recovery and getting inflation back to target. For all these reasons, the Government and the Bank agreed to renew the flexible inflation target at the 2 percent midpoint of a 1 to 3 percent inflation-control I would like to thank James (Jim) C. MacGee for his help in preparing this speech. Not for publication before December 15, 2021 12:00 pm Eastern Time -2range. Our renewed agreement also articulates more clearly how we will continue to use the flexibility that is built into our framework. This includes the use of extended monetary policy tools when needed and the increased emphasis we have been placing on the health of the labour market. Today, I want to briefly review our experience with flexible inflation targeting. I will then turn to the comprehensive review of our framework that we conducted over the past three years. And, importantly, I will focus on our renewed agreement and what it means as we pull out of this pandemic and prepare for the postpandemic economy. Our experience with flexible inflation targeting Monetary policy in Canada has been anchored by an inflation target for 30 years. Despite major external shocks—from the 2008–09 global financial crisis to the COVID-19 pandemic—inflation has remained much lower and more stable than it was prior to inflation targeting. In the 15 years before we began inflation targeting in 1991, inflation, as measured by the 12-month rate of change in the consumer price index, averaged 7.1 percent. Since then, it has averaged 1.9 percent. The unemployment rate has also been lower on average.1 Low, stable inflation has delivered clear benefits for Canadians. It has made it easier for households and businesses to plan for the future and has improved the functioning of labour markets. Keeping inflation low and stable has protected lowincome Canadians and those on fixed incomes from the loss of purchasing power caused by higher inflation. The Bank’s success in hitting the target on average over time has built credibility for both the target and the Bank. And inflation expectations that are well-anchored on the target have been a stabilizing force when the economy has been hit by shocks.2 Three elements of the framework have been key to its success. First, the target is symmetric—we are equally concerned about inflation rising above or falling below the target. Second, monetary policy is forward-looking. Policy actions take time—usually six to eight quarters—to work their way through the economy. That’s why our policy decisions are based on where inflation is likely to be in the future, not where it is today. And third, our framework is straightforward to communicate and has come to be well understood. 1 Since moving to the 2 percent inflation target in 1995, the unemployment rate has averaged 7.4 percent, compared with 8.9 percent in the 15 years before we had an inflation target. Taking a long-term perspective underscores the amazing success of flexible inflation targeting. We first started collecting data on inflation in 1913. Since then, Canada has experimented with a number of monetary policy frameworks, including the Gold Standard, the Bretton Woods system of pegged exchange rates and monetary growth targeting. None of these frameworks was able to deliver low and stable inflation. 2 See, for example, T. Macklem, “A Measure of Work” (speech to the Winnipeg Chamber of Commerce, Winnipeg, October 4, 2012); A. Côté, “Inflation Targeting in the Post-Crisis Era” (speech to the Calgary CFA Society, Calgary, November 18, 2014); D. Dodge, “Canada’s Monetary Policy Approach: It Works for Canadians” (speech to the Edmonton Chamber of Commerce, Edmonton, June 26, 2001); and G. Thiessen, “Can a Bank Change? The Evolution of Monetary Policy at the Bank of Canada 1935–2000” (lecture to the Faculty of Social Science, University of Western Ontario, October 17, 2000). -3It has also been tested by crisis. The COVID-19 pandemic has been an immense shock to our economy, and our framework has proven resilient. When the pandemic hit, economic activity plummeted and inflation fell sharply as many prices were discounted. The combination of exceptionally weak demand and negative inflation risked causing deflation and economic depression. At the outset of this crisis, the framework guided our policy response, including the use of forward guidance and quantitative easing. It also guided our decisions to taper and then end quantitative easing. Our monetary policy was complemented by an exceptional fiscal policy response, and together they put a floor under the crisis and supported recovery. Combined with effective vaccines, these policies have worked. Our economic recovery is now well advanced. But as we are all aware, the global economic rebound has generated elevated inflation in Canada and many countries. To a large extent, this reflects the unique circumstances of the pandemic. With global demand recovering faster than disrupted supply chains can respond, the prices for many goods have increased sharply. While we expect inflation to ease in the second half of 2022, we are closely watching inflation expectations and wage costs. And we will ensure that the forces pushing up prices do not become embedded in ongoing inflation. Our framework enables us to do just that. Reviewing our framework The review of our framework every five years is also a key feature of the Canadian system. The joint nature of the agreement between the Government and the Bank of Canada reinforces both the democratic legitimacy of the framework and our operational independence to pursue the agreed-upon objectives. The framework also allows Canadians to hold us accountable. The current review has been our most wide-ranging to date. After 30 years with an inflation target, it was time for a more systematic comparison of a range of alternatives. It was also time to listen to Canadians from coast to coast to coast. The review therefore encompassed two main elements. We undertook an evaluation of the alternatives to flexible inflation targeting—a horse race between what we have and what others have tried or have urged us to try. We also consulted with Canadians to hear about their experiences with inflation and the economy, and to learn about their aspirations for Canada’s monetary policy. To do this, we launched an online survey—Let’s Talk Inflation—and conducted focus groups, held round tables and facilitated online community discussions to listen to what Canadians had to say about our framework and possible alternatives. The response was impressive. More than 8,500 Canadians shared their views in our online survey, and hundreds more engaged with us in more in-depth discussions. The review was also the opportunity to consider how best to respond to two challenges facing monetary policy: lower neutral interest rates and labour market uncertainties. Let me say a few words about each of these challenges. The neutral rate of interest—the interest rate at which monetary policy neither stimulates nor holds back economic activity—is lower globally than in the past. That means central banks have less room to lower their policy interest rate in -4response to a big negative shock to the economy. COVID-19 brought this challenge into stark relief. The Bank of Canada, like many other central banks, cut its policy rate as low as it could go, to what we call the effective lower bound, or ELB. And we turned to other policy tools, including forward guidance and quantitative easing. A lower neutral interest rate means we are likely to need to use these policy tools more often in the future. These alternative tools work, but we don’t have as much experience using them. The second challenge is that the labour market is undergoing structural adjustment, and the relationship between employment and inflation is not as clear as it once was. My colleague Deputy Governor Larry Schembri spoke about this in November.3 Shifting demographics, technological change, globalization and the changing nature of work have made it harder to gauge when the economy has achieved the maximum sustainable level of employment. And the short-run relationship between output and inflation—what economists call the Phillips curve—appears weaker than in the past in Canada and in many other countries.4 Again, COVID-19 has only reinforced this challenge, accelerating structural change and affecting workers very unevenly. What we learned With our horse race, we set out to compare flexible inflation targeting with alternatives—average inflation targeting (AIT), a dual mandate that targets both inflation and employment, nominal gross domestic product targeting and pricelevel targeting. In our modelling and simulations, three frameworks—flexible inflation targeting, AIT and a dual mandate—had broadly similar overall performance and were superior to the other alternatives. The benefits of AIT were concentrated when inflation was below the target and the policy interest rate was at the ELB. But when inflation was above target, AIT tended to lead to increased volatility in employment and output. In our economic models, the dual mandate performed similarly to flexible inflation targeting.5 But it affected employment only very modestly, despite prioritizing it. 3 See L. Schembri “Labour Market Uncertainties and Monetary Policy” (speech to the Canadian Association for Business Economics, Toronto, delivered virtually November 16, 2021) and the discussion in Bank of Canada, “Chapter 3: Key challenges for the conduct of monetary policy,” Monetary Policy Framework Renewal (December 2021): 20–32. 4 The combination of these two uncertainties makes it harder to assess whether the economy has reached its full economic potential and therefore whether inflation will be sustainably on target. For a review of the literature on the estimates on the slope of the Phillips curve and labour market changes, see M. Cacciatore, D. Matveev and R. Sekkel, “Uncertainty and Monetary Policy Experimentation: Empirical Challenges and Insights from the Academic Literature,” Bank of Canada Staff Discussion Paper (forthcoming) and A. Landry and R. Sekkel, “Has the Canadian Phillips Curve Flattened? Evidence from Vector Autoregressions,” Bank of Canada Staff Analytical Note (forthcoming) for recent estimates of the slope of the Canadian Phillips curve. 5 J. Dorich, R. Mendes and Y. Zhang, “The Bank of Canada’s ‘Horse Race’ of Alternative Monetary Policy Frameworks: Some Interim Results from Model Simulations,” Bank of Canada Staff Discussion Paper No. 2021-13 (August 2021). -5This is because employment already plays a central role in the flexible inflationtargeting framework. For inflation to reach its target sustainably, the economy has to reach full employment. The two go hand in hand. Our public consultations complemented the expert analysis. The results highlighted both the diversity of Canadians’ experiences and some common themes. When asked about the alternative monetary policy frameworks, the people we engaged with gave the most support to flexible inflation targeting, AIT and a dual mandate. And overall, flexible inflation targeting was the preferred framework.6 The overriding message that came though from the consultations is that Canadians value low and stable inflation. Inflation is difficult for many. When the cost of living goes up, they have trouble stretching to cover all their expenses. Canadians are also concerned about the unequal impacts of inflation and economic cycles. It is striking to me that the results of our historical experience, modelling, simulations and public consultations were all in broad alignment. What comes through clearly is that flexible inflation targeting is hard to beat in theory and in practice. Its 30-year record of success has demonstrated that it is built for all seasons—it has survived the test of large global crises and done well in ordinary times. But some of the insights of AIT and a dual mandate could help us address the two important challenges facing monetary policy. What we agreed The new agreement on our monetary policy framework secures the continued benefits of flexible inflation targeting. And it provides increased clarity on how we will implement the framework to control inflation and help the economy reach its full potential. The Government of Canada and the Bank of Canada agreed that the best contribution of monetary policy to the well-being of Canadians is to continue to focus on price stability. The Government and the Bank also agreed that monetary policy should continue to support maximum sustainable employment. We also recognized that maximum sustainable employment is not directly measurable and is determined largely by non-monetary factors that can change over time. Further, the Government and the Bank agreed that because well-anchored inflation expectations are critical to achieving both price stability and maximum sustainable employment, the primary objective of monetary policy is to maintain low and stable inflation over time. The inflation target continues to be the 2 percent midpoint of a 1 to 3 percent inflation-control range. We want to maintain and safeguard the advantages of a clear and achievable target that is well understood and highly credible. 6 Bank of Canada, “Toward 2021: Consultations with Canadians.” -6The agreement also articulates how we will continue to use the flexibility that is an integral part of the framework. The agreement notes that our extended monetary policy tools can help address lower neutral interest rates. It notes that in the right circumstances, actively seeking maximum sustainable employment can help us address the inherent uncertainty about the level of employment that is consistent with price stability. And we will continue to consider a broad range of job market indicators to gauge the health of the labour market. This framework is what we need to complete the recovery from the pandemic. Having ended quantitative easing, we are now focused on our forward guidance—on assessing the diminishing degree of slack in the economy and on bringing inflation sustainably back to target. This framework is also what we need post-pandemic. While we all hope that we will never again see a recession as sharp as the one caused by COVID-19, it won’t be the last recession we face. We need to ensure that monetary policy has the ability to provide stimulus when needed in a world of low neutral rates. And even as the economy normalizes, uncertainty about maximum sustainable employment is not going away. The Government and the Bank also acknowledged that a low interest rate environment can be more prone to financial imbalances. In this context, the Government will continue to work with all relevant federal agencies to ensure that Canadian arrangements for financial regulation and supervision are fit for purpose and consider changes if and where appropriate. Additionally, while monetary policy cannot directly tackle the threats posed by climate change, the Bank will develop the modelling tools needed to take into account the important implications of climate change for the Canadian economy and financial system. In my remaining time today, let me expand on our extended monetary policy tools and the attention we are giving to labour markets. Using our tools to address low neutral rates With low global interest rates, the Bank is likely to lower its policy rate to the ELB more often in response to shocks. That means we may need to use forward guidance and our balance sheet more often than has been required in the past. We know that the rates that matter most for consumers and businesses are medium-term rates for mortgages, lines of credit and business loans. Forward guidance and quantitative easing can help us push these rates down.7 In certain circumstances, to support employment and return inflation to target, we can leverage the flexibility that already exists in our framework to make monetary policy more effective at the ELB. One of the best ways to do that is to use exceptional forward guidance. This involves committing to holding rates low for 7 In rare cases, we could also use credit easing, yield curve control, funding for lending, and negative interest rates to provide additional stimulus if needed. See P. Beaudry, “Our Quantitative Easing Operations: Looking Under the Hood” (speech to the Greater Moncton Chamber of Commerce, Fredericton Chamber of Commerce and Saint John Region Chamber of Commerce, delivered virtually, December 10, 2020). -7longer to instill greater confidence in the economic recovery. This can be done on its own or in combination with quantitative easing. This will help us avoid prolonged periods of below-target inflation and high unemployment. An implication of exceptional forward guidance is that inflation will likely go a little above the target after we exit from the ELB before it comes back to the target over the medium term. When we use forward guidance in this way, we will communicate this inflation dynamic clearly. Interestingly, the benefit of average inflation targeting relative to flexible inflation targeting is that it allows this kind of overshoot in inflation at the ELB. By using forward guidance in combination with the flexibility of our 1 to 3 percent control range, we can get this benefit too—without the costs of AIT when we are away from the ELB.8 A broad range of labour market indicators Canadians told us that they want employment to play a central role in our monetary policy framework. And our simulations illustrated the important role that maximum sustainable employment plays in successfully hitting the inflation target and helping to stabilize the economy. As I have already outlined, price stability and maximum sustainable employment go hand in hand. Achieving maximum sustainable employment is central to keeping inflation on target. In addition, there is now greater recognition—backed by economic research—that when the benefits of economic growth and opportunity are more evenly shared, prosperity improves for everyone.9 Few things are more central to the prosperity of Canadians than having a good job. But maximum sustainable employment is not directly observable, so we have to work to find it as well as to achieve it. To do this we are undertaking a broader and deeper assessment of the health of the labour market. We are looking beyond headline employment numbers to gauge the inclusiveness of the recovery and its job characteristics. Our new dashboard of labour market indicators compares the health of the labour market today with the situation just before the pandemic.10 We have some further work to do to use this broader set of indicators to assess where maximum sustainable employment is going forward. And you can expect to see more discussion from us linking our analysis of labour markets to our monetary policy decisions. 8 Patience at the ELB, combined with forward guidance, offers benefits similar to those of AIT. It differs from AIT in that it does not commit us to making up for past misses of the inflation target. 9 See, for example, T. Macklem, “The Benefits of an Inclusive Economy” (speech to the universities of Atlantic Canada, delivered virtually, May 13, 2021), as well as C.-T. Hsieh, E. Hurst, C. I. Jones and P. J. Klenow, “The Allocation of Talent and U.S. Economic Growth,” Econometrica 87, no. 5 (2019): 1439–1474 and D. Ostry, J. Alvarez, R. A. Espinoza and C. Papageorgiou, “Economic Gains from Gender Inclusion: New Mechanisms, New Evidence,” International Monetary Fund Staff Discussion Note No. 18/06 (2018). 10 E. Ens, L. Savoie-Chabot, K. See and S. L. Wee, “Assessing Labour Market Slack for Monetary Policy,” Bank of Canada Staff Discussion Paper No. 2021-15 (October 2021) outline a preliminary approach to a range of labour market indicators to help guide monetary policy. -8The agreement also notes that when conditions warrant, the Bank may use the flexibility of the 1 to 3 percent control range to actively seek the maximum level of sustainable employment. When might conditions warrant? When inflation is close to target, interest rates are at more normal levels, and we’re not sure if we’ve really reached maximum sustainable employment. That is not the current situation, of course, since inflation is now already considerably above our target and our policy interest rate is very low. But as we move beyond this pandemic and the economy normalizes, uncertainty about maximum sustainable employment will persist. When conditions warrant, we can probe by being more patient to help us better gauge the level of employment that is consistent with price stability. This not a new idea. In the two years before the pandemic, unemployment in Canada was around 40-year lows. Based on past economic cycles, we would have expected inflationary pressure to begin to increase. But inflation was not rising above the target. By being patient, the Bank learned that the level of employment that is consistent with price stability was higher than most previous estimates. Our flexible inflation-targeting framework contemplates seeking or probing for maximum sustainable employment in the right circumstances. When we do this, we will be transparent, communicating that we are probing and what we are seeing in our labour market and inflation indicators as we do so. Communication is key This brings me to the final, and very important, point. We know that monetary policy works better when people understand it. This starts with a clear mandate. And it is enhanced by transparency. The move toward increased transparency by central banks over the past 30 years has increased the credibility and effectiveness of monetary policy. By explaining how our decisions link to our mandate and by delivering low inflation for 30 years, our monetary policy framework has earned the trust of Canadians. To keep that trust, we will be clear about how we are implementing flexible inflation targeting. Because monetary policy needs to be forward-looking, our decisions and our communication are anchored by our inflation forecast, our interpretation of incoming data relative to that forecast, and our assessment of the risks.11 This will include how a broad set of labour market indicators are affecting our estimates of potential output and our assessment of inflationary pressures. We will continue to use the flexibility built into our framework when that flexibility will help us better manage risks and achieve our mandate. And when we use that flexibility, we will be clear about why and how we are using it. You will see it in our inflation forecast, and we will discuss it relative to incoming data and our assessment of the risks. 11 See Bank of Canada, “Box 10: Evolving communications, increased transparency,” Monetary Policy Framework Renewal (December 2021): 72–74. Conclusion It’s time to conclude. Our monetary policy framework has delivered prosperity to Canadians by keeping inflation very close to 2 percent, on average, for 30 years. Flexible inflation targeting is well understood and broadly supported by Canadians. And the credibility of the target helps to stabilize both inflation and output. This agreement reaffirms our commitment to price stability and the 2 percent target. This is the framework we need now as we face elevated inflation and the challenge of reopening the economy. Looking beyond the pandemic, the renewed agreement also articulates clearly how we will continue using the flexibility in our framework to address future challenges confronting our economy. It explains how we will use our extended set of monetary policy tools when needed. And it outlines how we have begun to use a broader range of labour market indicators to assess full employment and the economy’s potential output. This will help us achieve our inflation target. This agreement provides continuity and clarity, and it strengthens our framework to manage the realities of the world we live in. And it is what we need today and tomorrow to foster continued prosperity for Canadians. Thank you.
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, to the Standing Senate Committee on Banking, Trade and Commerce, Ottawa, Ontario, 2 February 2022.
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Tiff Macklem: Opening statement before the Standing Senate Committee on Banking, Trade and Commerce Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, to the Standing Senate Committee on Banking, Trade and Commerce, Ottawa, 2 February 2022. * * * Good afternoon. I’m pleased to be here with you to discuss last week’s policy announcement and the Bank of Canada’s most recent Monetary Policy Report (MPR). I am especially pleased to have Senior Deputy Governor Carolyn Rogers here for her first appearance before this Committee. She has joined the Governing Council at an important time. Our message is threefold. First, the emergency monetary measures needed to support the economy through the pandemic are no longer required and they have ended. Second, interest rates will need to increase to control inflation. Canadians should expect a rising path for interest rates. Third, while reopening our economy after repeated waves of the COVID-19 pandemic is complicated, Canadians can be confident that the Bank of Canada will control inflation. We are committed to bringing inflation back to target. Let me take each of these in turn. The Bank’s response to the pandemic has been forceful. Throughout, our actions have been guided by our mandate. We have been resolute and deliberate, communicating clearly with Canadians on our extraordinary measures to support the economy—and on the conditions for their exit. We said we would end emergency liquidity measures to support core funding markets when market functioning was restored, and we did. We said our quantitative easing (QE) program would continue until the recovery was well underway. We began tapering QE last spring and ended it in October. Last week’s policy announcement marked the final step in exiting from emergency policies. We said exceptional forward guidance would continue until economic slack was absorbed. With the strength of the recovery through the second half of 2021, the Governing Council judged this condition has been met. As such, we have removed our commitment to hold our policy rate at its floor of 0.25%. Second, we want to clearly signal that we expect interest rates will need to increase. A lot of factors are contributing to the uncomfortably high inflation we are experiencing today, and many of them are global and reflect the unique circumstances of the pandemic. As the pandemic fades, conditions will normalize, and inflation will come down. However, with Canadian labour markets tightening and evidence of capacity pressures increasing, the Governing Council expects higher interest rates will be needed to bring inflation back to the 2% target. Finally, Canadians can be assured that the Bank of Canada will control inflation. Prices for many goods and services are rising quickly, and this is making it harder for Canadians to make ends meet—particularly those with low incomes. Prices for food, gasoline and housing have all risen faster than usual. We expect inflation will remain high through the first half of 2022 and then move lower. There is some uncertainty about how quickly inflation will come down because we’ve never experienced a pandemic like this before. But Canadians can be assured that we will use our monetary policy tools to control inflation. 1/3 BIS central bankers' speeches Let me turn to the economic outlook we outlined in our MPR, and some of the Governing Council’s thinking around our forecast and last week’s rate decision. Globally, the pandemic recovery is strong but uneven and continues to be marked by supply chain disruptions. Robust demand for goods combined with these supply problems and higher energy prices have pushed inflation up around the world. In Canada, consumer price index (CPI) inflation is currently well above our target range and core measures have edged up. Inflation is expected to remain close to 5% in the months ahead, but pressures should ease in the second half of 2022, and inflation should decline relatively quickly to around 3% by the end of the year. Further out, we expect inflation will gradually return close to the 2% target over 2023 and 2024. Measures of inflation expectations are broadly in line with our own forecast, with longer-term expectations remaining well anchored on the 2% target. The Governing Council agreed it is paramount to ensure that higher near-term inflation expectations don’t migrate into higher longterm expectations and become embedded in ongoing inflation. In October, we projected the output gap would close sometime in the middle quarters of this year. But growth in the second half of 2021 was even stronger than we had projected, and a wide range of measures now suggest economic slack is absorbed. Employment is above prepandemic levels, businesses are having a hard time filling job openings, and wage increases are picking up. The rapid spread of the Omicron variant will weigh on growth in the first quarter. But our high rates of vaccination and adaptability to restrictions should limit the downside economic risks of this wave. We forecast annual growth in economic activity will be 4% this year and about 3½% in 2023, as consumer spending on services rebounds and business investment and exports show solid growth. Putting all this together, Governing Council concluded that, consistent with our forecast, a rising path for interest rates will be required to moderate spending growth and bring inflation back to target. Of course, we discussed when to begin increasing our policy interest rate. Our approach to monetary policy throughout the pandemic has been deliberate, and we were mindful that Omicron will dampen spending in the first quarter. So we decided to keep our policy rate unchanged last week, remove our commitment to hold it at its floor, and signal that rates can be expected to increase going forward. The timing and pace of those increases will be guided by the Bank’s commitment to achieving the 2% inflation target. This ends our emergency policy setting and signals that interest rates will now be on a rising path. This is a significant shift in monetary policy, and we judged that it is appropriate to move forward in a series of steps. By being clear and deliberate, we are really trying to cut through the noise so that monetary policy is a source of confidence rather than another source of uncertainty. Let me say a final word about another important monetary policy tool—our balance sheet. The Bank will keep the holdings of Government of Canada bonds on our balance sheet roughly constant at least until we begin to raise the policy interest rate. At that time, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing Government of Canada bonds to roll off. As we have done in the past, before implementing changes to our balance sheet management, we will provide more information on our plans. With that, Senior Deputy Governor Rogers and I will be happy to take your questions. 2/3 BIS central bankers' speeches Content Type(s): Press, Speeches and appearances, Opening statements 3/3 BIS central bankers' speeches
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Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, to the Canadian Chamber of Commerce, Ottawa, Ontario, 9 February 2022.
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Remarks by Tiff Macklem Governor of the Bank of Canada Canadian Chamber of Commerce February 9, 2022 Ottawa, Ontario (delivered virtually) The role of Canadian business in fostering non-inflationary growth Introduction It is a pleasure to join this summit to talk about the economic recovery. I’m particularly pleased to be here to discuss the challenges Canada must overcome to sustain strong growth. And when I say, “sustain strong growth,” to be clear, that means “non-inflationary growth.” There is no better time than now to have this discussion. Our economic recovery from the deepest recession on record has been strong. Canadian businesses and workers have shown impressive ingenuity and resilience. Employment is robust, household savings are high, and immigration is rebounding. As we emerge from the COVID-19 pandemic, Canada has the opportunity to make long overdue gains in productivity. In the years ahead, business investment decisions will determine the path of Canada’s productivity growth. And productivity growth is vital to non-inflationary growth and rising standards of living. At a time when inflation is already well above our target, this is more vital than ever. Today, I’d like to talk to you about two things. First, I want to unpack what is behind the Bank of Canada’s latest economic projection and explain why we expect a pickup in investment and productivity growth. And second, I’d like to outline the path to get there—crossing a bridge from the ingenuity we’ve seen through the pandemic to long-term productivity growth. Unpacking the projection Canada has come through the pressure cooker of the pandemic with impressive resilience, and critical business investments in digital technologies were an important element of this success. Those of us who could shifted to remote work. Almost everyone learned how to buy and sell online, and many businesses shifted supply chains as borders closed. By January 2021, during the second Canadian lockdown, one-third of Canadian employees worked most of their I would like to thank Tatjana Dahlhaus, Christopher Hajzler, James (Jim) C. MacGee, Temel Taskin and Ben Tomlin for their help in preparing this speech. Not for publication before February 9, 2022 12:00 pm Eastern Time -2hours from home, compared with just 4% in 2016.1 These digital investments have been essential to sustaining our economy through the pandemic. Of course, the pandemic has also held productivity back for a variety of reasons. Disruptions to global supply chains have made it harder for businesses to get critical inputs, limiting the productivity of labour and capital. Public health restrictions have necessitated more people and space to do the same work. And rapidly changing circumstances have made it hard to plan and operate efficiently. As the pandemic fades, these forces should dissipate, creating the opportunity to increase productivity. There are two fundamental sources of growth in gross domestic product—more workers and more output per worker. We call output per worker productivity.2 We measure workers by total hours worked, which is the product of employment and average hours worked. We call this labour input. And we measure productivity as output divided by labour input. Comparing Canada and the United States through the pandemic and recovery, we can see that Canada’s rebound in employment has been considerably stronger. But workers in the United States increased their hours of work by much more than workers did in Canada. So the recovery in labour input has been quite similar in both countries. The difference lies in productivity. Productivity growth has been considerably stronger in the United States, so with roughly the same recovery in labour inputs, the United States has seen a larger increase in output (Chart 1). The question is why? Chart 1: Canada’s labour productivity lags the United States Index: 2019Q4 = 100 Index Real gross domestic product Labour input Productivity Canada Employment Average hours worked United States Sources: Statistics Canada, US Bureau of Labor Statistics via Haver Analytics and Bank of Canada calculations Last observation: 2021Q3 1 See T. Mehdi and R. Morisette “Working from Home in Canada: What Have We Learned So far?” Statistics Canada Economics and Social Reports 1, No. 10 (October 2021). 2 True underlying productivity or efficiency cannot be directly observed, and it can be volatile in the short run. That’s especially valid now because of the stops and starts of the pandemic lockdowns. -3There appear to be two related factors. Public health restrictions have been more comprehensive in Canada, causing temporary restraints on economic activity.3 As we emerge from the pandemic, we should make up this difference. But the second reason could have more lasting consequences: business investment through the pandemic has been considerably stronger in the United States than in Canada. Indeed, US businesses have long been investing in more capital per worker than Canadian businesses have, and this gap has widened over the past decade (Chart 2).4 The share of investment in information and communications technology (ICT) equipment has also been lower in Canada, and this gap has widened too (Chart 3). This is significant because research shows that ICT investment has played an important role in driving productivity growth.5 In addition, research shows that capital in the United States has moved to higherproductivity sectors in larger amounts than it has in Canada.6 In other words, US capital has been more nimble. Chart 2: Business investment per worker is higher in the United States Current prices, Purchasing Power Parity adjusted for the United States, annual data Can$ thousands Sources: Statistics Canada, US Bureau of Economic Analysis, US Bureau of Labor Statistics and Bank of Canada calculations Last observation: 2020 Canada United States 3 As measured by the Oxford COVID-19 Government Response Tracker, the stringency index for the Canadian government’s response over the course of the pandemic was higher, on average, at 65, than that for the US government, at 57. At the end of January 2022, COVID-19 deaths per million people were 886 in Canada compared with 2,656 in the United States. 4 Chart 2 compares business investment per worker excluding the oil and gas sectors in both countries to make the industrial structures more comparable. If oil and gas are included, the widening of the gap is more pronounced in the last eight years. 5 See, for example, V. Spiezia, “ICT Investments and Productivity: Measuring the Contribution of ICTS to Growth,” OECD Journal: Economic Studies 2012, No. 1 (December 2012): 199–211; and A. Colecchia and P. Schreyer, “ICT Investment and Economic Growth in the 1990s: Is the United States a Unique Case? A Comparative Study of Nine OECD Countries,” Review of Economic Dynamics 5, No. 20 (April 2002): 408–442 . 6 See L. Shao and R. Tang, “Allocative Efficiency and Aggregate Productivity Growth in Canada and the United States,” Bank of Canada Staff Working Paper No. 2021-1 (January 2021). -4Chart 3: Investment in ICT in Canada has lagged the United States Percentage of gross fixed capital formation, annual data % Canada United States Sources: Organisation for Economic Co-operation and Development and Bank of Canada calculations Last observation: 2019 The question is, does COVID-19 provide us with an opportunity to change our course? I believe it does. In our projection, we expect business investment in Canada to pick up (Chart 4). Corporate balance sheets are generally strong, and companies are increasingly reporting that they are facing capacity constraints.7 In addition, consumer demand is anticipated to remain robust, and US demand for our exports is strengthening. Chart 4: Business investment projected to grow faster in Canada Index: 2019Q4 = 100, quarterly data Index 2019 2020 Canada United States Sources: Statistics Canada, US Bureau of Economic Analysis, and Bank of Canada calculations and projections 7 In the Business Outlook Survey, more than three-quarters of respondents reported they would have difficulty responding to an unexpected increase in demand. -5In our most recent Business Outlook Survey, 62% of firms reported that they are planning to spend more on machinery and equipment in the year ahead than they did last year—the highest reading since we started the survey in 1999 (Chart 5). Chart 5: Firms’ plans to invest in machinery and equipment are strong % Note: Percentage of respondents to the Business Outlook Survey reporting "Higher" when asked the question, "Over the next 12 months, is your firm’s investment spending on machinery and equipment expected to be higher, lower or the same as over the past 12 months?" Source: Bank of Canada Last observation: 2021Q4 This all points to solid growth in business investment in Canada. Indeed, we expect that business investment will grow faster in Canada than in the United States. It’s imperative that businesses in Canada follow through on these plans or risk losing out to US competitors. For the economy as a whole, investment is critical to non-inflationary growth. In our projection, productivity growth rises as pandemic restrictions ease, supply chain bottlenecks dissipate, and companies return to more efficient operations. To sustain this rise in productivity, we need business investment to pick up. With the labour market already tight and wages rising, productivity growth is vital to economic growth—and to increasing wages without raising unit labour costs. In our forecast, productivity growth in Canada closes in but remains below US productivity growth. But I suspect our forecast does not do justice to your ambition. And as much as we like to get our forecasts right, we would be happy to be surprised by the strength of investment and productivity. The bridge to the future So how do we get more growth without inflation? The short answer is by investing in capital and in people. And by confronting our weaknesses and playing to our strengths. I believe an opportunity exists to build a bridge between the short-term changes Canadians have made to cope with COVID-19 and the sustained investments that will grow our economy and improve our quality of life. Let me expand. -6The pandemic has pulled forward digital investments. It has also pulled forward the digital economy. With more firms and consumers using more digital infrastructure, related jobs have multiplied.8 These digital investments need to continue. The other element is investing in people. The public and private sectors share this responsibility, and it’s a strength for Canada. Our strong labour market participation rates, high levels of immigration, and the access to quality education in Canada are long-standing advantages for us. The pandemic presents an opportunity to build on these strengths. Remote work is one of the most visible changes wrought by the pandemic. It has created challenges for workers, families and employers alike. But as new, more flexible work arrangements become embedded, we’re expecting productivity gains.9 And the productivity of remote work will likely rise further as innovation continues.10 With sustained investment in technology that enables remote work, and innovations in new ways of working, businesses can both raise their workers’ productivity and expand their access to new workers who value flexibility. Throughout the pandemic, parents—particularly mothers—were affected disproportionately, and challenges of continued child care disruptions remain. But in Canada, by the end of last year, the female labour market participation rate had returned to pre-pandemic levels. By this metric, the so-called she-cession has largely recovered. Businesses in Canada have an opportunity to lean into this bounce back in female participation and leverage new ways of working to attract more women. The Government of Canada’s new universal child care program has the potential to improve access to and reduce the cost of daycare. This should support higher labour market participation of parents, particularly women. More broadly, with labour markets already tight, we know that businesses are going to have a harder time hiring workers. Companies need to reach into underutilized communities to attract more diverse workers—not only because they need the workers, but also because the diversity will benefit their business. The digitalization trend accelerated by the pandemic, including remote work, may boost labour force participation among those who can’t balance standard work hours or locations with other demands in their life. Increased immigration also provides an opportunity to add workers and skills. While the pandemic cut immigrant flows nearly in half in 2020, Canada met its ambitious immigration target for 2021, and further increases are projected for 2022. Education has also been a challenge throughout the pandemic. But we can’t afford to lose our education edge. In 2020, 60% of Canadians had a college or 8 See A. Bellatin and G. Galassi, “Canadian Job Postings in Digital Sectors During COVID-19,” Bank of Canada Staff Analytical Note No. 2021-18 (August 2021). 9 See J. M. Barrero, N. Bloom and S. J. Davis, “Why Working from Home Will Stick,” National Bureau of Economic Research Working Paper No. 28731 (April 2021). 10 See N. Bloom, S. J. Davis and Y. Zhestkova, “COVID-19 Shifted Patent Applications Toward Technologies that Support Working from Home,” AEA Papers and Proceedings vol. 111 (May 2021). -7university degree, compared with 50% of Americans, though we lag in advanced degrees.11 University enrolment in Canada by young adults has increased during the pandemic, which is encouraging.12 And enrolment in university science, technology, engineering and math (STEM) programs has been increasing over time.13 Businesses, too, have a critical role in training and preparing workers for new digital technologies.14 New online learning platforms have reduced the cost, improved the flexibility and expanded the reach of learning. Businesses must also be willing to pay up for talent, and that comes back to productivity—higher productivity pays for higher wages.15 Workers and the public sector also play critical roles in expanding our economy’s growth potential. Workers must be prepared to update their skills and retrain throughout their careers, with the help of both their employers and the public sector. Universities and colleges need to continue to expand STEM programs and extend the development of digital and entrepreneurial skills more broadly. Governments have to help get people launched and support business investment and opportunity. I hope we can dig more deeply into the challenges you see on that front as we turn to our discussion today. Conclusion Before we do that, let me conclude with the Bank of Canada’s role. We have a responsibility to deliver low, stable and predictable inflation so Canadians can plan and invest with confidence. At close to 5%, the current rate of inflation is too high. This is well above our 2% target. How did this happen? It is not the result of generalized excess demand in the Canadian economy. Our economy is only just now getting back to full capacity. The inflation we are experiencing today largely reflects global supply problems, most of which stem from the pandemic. With many services shut down, households around the world bought goods instead. But the pandemic has impaired supply chains, holding back both production and transportation. The result has been sharply higher prices for many goods. Oil prices have also risen, and food prices are being boosted by poor harvests. While uncertainty remains, there is some evidence global supply chain problems may have peaked. As the pandemic recedes, conditions around the world should normalize, taking 11 Organisation for Economic Co-operation and Development, Education at a Glance 2021: OECD Indicators, Table A1.1 (page 48, September 2021). 12 Statistics Canada, “Participation Rate in Education, Population Aged 15 to 29, by Age and Type of Institution Attended,” Table 37-10-0101-01 (November 2021). 13 Statistics Canada, “Participation Rate in Education, Population Aged 15 to 29, by Age and Type of Institution Attended,” Table 37-0011-01 (November 2021). 14 For much of the past two decades, Canadian firms spent less on training per employee than their US counterparts (Conference Board of Canada, “Learning Cultures Lead the Way: Learning and Development Outlook—14th Edition [January 2018]). By the end of the last decade, the gap began to close, but this was mainly due to a decrease in spending by US firms. 15 See Y. Park, G. Galassi and N. Kyui “Learning and Earning: The Payoffs of Higher Education,” Bank of Canada The Economy, Plain and Simple (October 7, 2020). -8pressure off global goods prices. As this happens, we expect inflation to come down relatively quickly in the second half of 2022 to about 3% by the end of the year. But to get inflation the rest of the way back to its 2% target, we need a significant shift in monetary policy. That’s why, in January, we removed our exceptional commitment to hold the policy interest rate at its floor of 0.25% and told Canadians they should expect interest rates to increase. The Bank’s Governing Council agreed that the economy will need higher interest rates to moderate growth in spending and bring demand in line with supply. We also agreed that we must keep inflation expectations well anchored. If inflation expectations become unmoored, the costs of getting inflation back to target will be much higher. For both of these reasons, we signalled with unusual clarity that Canadians should expect a rising path for interest rates. What can businesses expect from us? We will continue to act deliberately and communicate clearly so monetary policy is a source of confidence, not of uncertainty. And as businesses set prices and wages, firms and workers alike can be assured that the Bank of Canada will use its monetary tools to control inflation. Your business decisions have important implications for the performance of the Canadian economy. Your ingenuity and willingness to invest in digitalization have laid the groundwork for productivity growth—now we need to turn that short-term success into long-term growth. Canadians count on the Bank of Canada to control inflation. And they count on businesses to invest in capital and people to grow our economy. So let’s discuss the issues and consider solutions together. Thank you.
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Speech (delivered virtually) by Mr Timothy Lane, Deputy Governor of the Bank of Canada, to the University of Calgary's School of Public Policy, Calgary, Alberta, 16 February 2022.
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Remarks by Timothy Lane Deputy Governor School of Public Policy, University of Calgary February 16, 2022 Calgary, AB Protected B Expecting the unexpected: Central bank decision making in turbulent times Introduction Good morning. I’m happy to be here with you today, albeit virtually. For two years now, we have been living through a period of history like no other. Successive waves of COVID-19 have claimed the lives and livelihoods of many Canadians. The economic impacts have also been extraordinary. The Canadian economy has now recovered substantially. Economic activity is above its pre-pandemic level and employment is near its maximum sustainable level. But the economy is still not back to normal. This has been a time of tremendous uncertainty for both economic policy-makers and those in the fields of health and science. So it seems fitting to begin our discussion with a thought from renowned Canadian physician William Osler, who is often described as the father of modern medicine. Over a century ago, Dr. Osler transformed the way medicine was taught by combining classroom study with bedside experience. He said that medicine is a science of uncertainty and an art of probability. That could apply equally to economic policy, and never more so than now. Indeed, Osler’s emphasis on the need to combine analysis with experience is highly relevant to the uncertain world of economics. Today I would like to talk about how the Bank of Canada makes decisions in turbulent times. I will use the pandemic as a case study. In doing so, I will draw back the curtain on the Bank’s deliberations during various stages of the crisis and how that thinking shaped our policy actions and our communications with Canadians. Finally, I’ll speak I would like to thank Don Coletti for his help in preparing this speech. Not f or publication before February 16, 2022 1:30 pm Eastern Time more generally about how we are adapting our own practices at the Bank to better anticipate and respond to uncertainty in the future. Looking back over the past two years Let me set the stage by briefly reviewing what has happened to the Canadian economy over the past two years. In early 2020, the pandemic triggered sudden and severe economic contractions around the world. In Canada, gross domestic product (GDP) declined by about 15% and about three million Canadians lost their jobs. Inflation also declined sharply, from around 2% to near zero. This was largely due to the collapse in world oil prices. We also saw declines in the prices of hard-to-distance services such as air travel—for the few still flying. But if the economic contraction was unprecedented, so was the recovery that followed. As we can see in Chart 1, GDP bounced back sharply in the second half of 2020 when the initial surge in the number of COVID-19 cases stabilized. More recently, GDP actually passed its pre-pandemic level. Chart 1: Real gross domestic product in Canada Quarterly data, chained 2012 dollars, seasonally adjusted at an annual rate Can$ billions 2,250 2,200 2,150 2,100 2,050 2,000 1,950 1,900 1,850 1,800 Real GDP Note: Dashed line indicates projected level from the January 2022 Monetary Policy Report. Sources: Statistics Canada and Bank of Canada projections s Projected GDP Last data plotted: 2022Q4 And, as this next chart shows, the recovery in employment was also impressive (Chart 2). Chart 2: Employment and unemployment in Canada Monthly data, seasonally adjusted a. Total employment in Canada b. Unemployment rate in Canada Millions % Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Total employment Sources: Statistics Canada Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Unemployment rate Last observation: January 2022 Robust job gains have brought employment back to where it was before the pandemic. A range of measures shows that with this recovery, overall slack in the Canadian economy has been fully absorbed. Indeed, we are seeing increasing signs of scarcity of labour and of some goods.1 Meanwhile, the next chart shows that inflation not only recovered from near zero but is now well above the Bank’s 2% target (Chart 3, panel a). For more details, see Bank of Canada, “Box 3: Economic slack in the fourth quarter of 2021,” Monetary Policy Report (January 2022). Chart 3: Consumer price index and inflation in Canada Monthly data a. Consumer price index inflation, year-over-year percentage change, not seasonally adjusted % 6.0 b. Consumer price index, actual versus implied path consistent with the 2% inflation target, seasonally adjusted Index 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct CPI inflation Sources: Statistics Canada and Bank of Canada calculations Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct CPI Implied CPI path consistent with the 2% inflation target Last observation: December 2021 This surge in inflation has been more persistent than anticipated. Part of it reflects a catch-up in prices after inflation dropped in 2020 (Chart 3, panel b). It also reflects the impacts of both supply constraints and strong demand in global markets—especially for goods. We now expect that inflation will remain close to 5% through the first half of this year. The initial policy response So now that we’ve talked about our journey over the last two years, let’s turn our attention to the policy response in those early days of the crisis. The sheer scale and complexity of this pandemic was beyond what anyone anticipated. How did the Bank navigate its course? Once the virus spread across the world and the first lockdowns were implemented, we clearly understood that the economic and financial impacts would be serious. Just how serious was still quite uncertain. But we knew that the situation called for extremely aggressive policy responses, right from the start. Our thinking was that it was better to do too much up front to strongly support the recovery than to play catch-up later. When the pandemic first hit, the top priority was to support Canadian households and businesses. In addition to helping those most directly affected, our goal was to prevent second-round effects on other sectors of the economy—notably the impacts that can occur when those who have lost income cut back their spending. We were also worried about businesses delaying investments. A second problem we needed to tackle right away was the breakdown of financial markets. In an atmosphere of panic, asset values plummeted and we saw a generalized dash for cash. Market liquidity suddenly evaporated—in other words, sellers had difficulty finding buyers, even for safe assets such as government bonds. This dynamic threatened to block the flow of credit for households and businesses just when they needed it most. The Bank responded swiftly and aggressively to restore calm to financial markets. We provided liquidity to the financial system through several channels, including repurchase agreements and direct asset purchases in a range of financial markets. These actions, alongside similar measures taken by central banks in other countries, quickly restored market functioning worldwide. It was clear that the federal government’s fiscal policy would need to take primary responsibility for supporting households and businesses, because it could focus that support to manage the uneven impacts of the pandemic. Many Canadians who had the option of working remotely stayed employed. Meanwhile, many in hard-to-distance services—disproportionately staffed with lower-wage workers, racialized Canadians, and women—lost their jobs. The government quickly responded with transfers to support incomes for affected households and to keep businesses afloat. The Bank acted forcefully with monetary policy as well. During March 2020, we cut our policy interest rate three times, from 1.75% to 0.25%. In July, we pledged to keep the rate at this level “until economic slack is absorbed.” In October we complemented our conditional forward guidance with a forecast—but not a commitment—of when we thought that condition would be met. The decision not to commit to a specific date reflected the great uncertainty around the outlook. We also committed to continue our purchases of government bonds until the recovery was well underway. These purchases were made initially to restore market functioning but then served as another tool of monetary policy: quantitative easing. This tool was implemented to keep borrowing costs low across the yield curve. The overriding goal was to support the economy through this economic contraction and bring inflation back to the Bank’s 2% target. That’s because, if left unchecked, the pandemic forces at work on the economy in those early days could drive inflation persistently below zero, starting a deflationary spiral. These policies combined a bold response with a clear exit strategy. Given the heightened uncertainty, our exit from emergency measures had to be based on outcomes, not on a fixed calendar. That is, we would: • • • provide liquidity until market functioning was restored continue quantitative easing until the recovery was well underway maintain our forward guidance until slack was absorbed We provided clarity about the conditions for exit while recognizing that the timing must depend on how the situation unfolded. As events played out, we updated Canadians on when the conditions were likely to be satisfied. Markets could also update their own views as data came in. How did our views and policy response evolve? The recession Canada faced was nothing like a textbook case and there was exceptional uncertainty about how it would play out. In fact, in our April 2020 Monetary Policy Report, we did not publish our usual forecast but instead presented a range of possible outcomes as we see here (Chart 4). Chart 4: Real GDP, projected range versus actual Quarterly data, chained 2012 dollars, seasonally adjusted at an annual rate Can$ billions 2,250 2,000 1,750 1,500 1,250 Range of scenarios* * Projected range from the Bank of Canada’s April 2020 Monetary Policy Report Statistics Canada and Bank of Canada projections GDP Last data plotted: 2022Q4 These possible outcomes reflected two distinct dynamics. Some economic activity and employment would return to normal levels as soon as the pandemic subsided and lockdowns were lifted—similar to what often happens following a natural disaster. Other economic activity would take longer to come back. Indeed, in the spring of 2020 economists around the world debated about whether the recovery would be V-shaped or L-shaped. The Bank’s view was that each of these dynamics would likely play out in turn, resulting in a two-phased recovery: first reopening and then recuperation. Why did we expect full recuperation to take longer? It was partly because of our experience with the global financial crisis of 2008–09. The long, drawn-out recovery that followed that crisis reflected a large and prolonged rise in unemployment and massive damage to balance sheets. As a result, the global economy took 10 years to recover to its pre-crisis trend. Labour markets can be damaged by lengthy recessions. Unemployment can have persistent effects on people’s skills and their ability to re-enter the workforce. Because the pandemic began with such a huge increase in unemployment and so much uncertainty around how long the pandemic would last, this concern was front of mind. The unevenness of job losses caused by the pandemic also suggested that inequality could widen, which itself has negative economic consequences. In all, we saw powerful downdrafts on the economy in those early months—reflected in our expectation that it would take until 2023 for slack to be absorbed. The same view was evident in our projection for inflation at the time. We can see in Chart 5 that our earlier projection showed inflation creeping up to our 2% target over three years. Chart 5: Consumer price index inflation, projected versus actual Year-over-year percentage change, quarterly data, not seasonally adjusted % -1 Projected CPI inflation* Actual CPI inflation * Projected CPI inflation from the Bank of Canada’s July 2020 Monetary Policy Report Sources: Statistics Canada and Bank of Canada projections Last data plotted: 2022Q4 Needless to say, this is not exactly how things turned out. The economy’s path of recovery has followed the upper edge of the range we had contemplated. Employment recovered more quickly than expected. And inflation persistently ran much higher than anticipated and is now well above our target. But why? It really comes down to supply and demand. In the early months of 2020, we realized that the pandemic would have adverse effects on both demand and supply. On the demand side, we expected households to rein in their spending while job losses translated into lower household incomes and weaker confidence. The experience from the global financial crisis also suggested that financial institutions could be less willing to lend amid the heightened uncertainty. This experience also suggested that it could take a long time for consumer confidence and spending to recover. On the supply side, we anticipated a temporary loss of supply or productive capacity . Some production facilities were locked down and for others, the extra time and effort needed to comply with health requirements could weigh on productivity. But our projections assumed that the effects on supply would be less severe and would ease fairly quickly as restrictions were lifted. Since demand was expected to take longer to recover than supply, that meant that persistent economic slack would continue to put downward pressure on inflation. There are several ways in which supply and demand behaved differently than we expected. For one thing, vaccines were developed and deployed in record time, a little more than a year after the pandemic first began and one year sooner than we originally assumed. In addition, we underestimated the ability of businesses and workers to adapt to the pandemic and learn how to work around it in innovative ways. This period is marked by accelerated growth in all aspects of the digital economy.2 These are important reasons why both demand and supply—and thus GDP—recovered so quickly. The forcefulness of our economic policy response also helped us avoid many of the negative effects on demand that we had been concerned about. The scale of fiscal transfers meant that the disposable income of Canadian households actually increased during the pandemic and business bankruptcies declined—both unheard of during a recession. Households were able to increase savings and pay down non-mortgage debts. And the financial system, far from being a source of drag on the economy, became a sturdy support. A related factor that was initially underestimated was the shift of demand both in Canada and abroad. Households that could not spend on services like restaurant meals and vacations shifted their spending to goods that were available, such as sports equipment, appliances and electronics. This shift in demand toward goods increasingly ran up against global supply constraints during 2021, helping to push inflation higher than expected.3 Production disruptions proved to be a more troublesome force than originally anticipated. Because production is highly interconnected across countries, disruptions in one country quickly resulted in supply shortages in others. Specific chokepoints surfaced—such as the supply of semiconductors and shipping capacity—but the See T. Lane, “The Digital Transformation and Canada’s Economic Resilience” (speech delivered virtually to Advocis Western Canada Chapters, Edmonton, Vancouver and Winnipeg, June 10, 2021). See T. Gravelle, “Economic Progress Report: A Recovery Unlike Any Other” (speech delivered virtually to the Surrey Board of Trade, Surrey December 9, 2021). disruptions became increasingly persistent and widespread. Even now, it’s unclear how long it will take to resolve these issues. Furthermore, Canadian firms have increasingly faced their own capacity constraints. A record number of respondents to our December Business Outlook Survey said they would have difficulty meeting increased demand. This partly reflects shortages of essential imported components. But it also speaks to the shortages of workers— particularly those with specialized skills—caused by tightening labour markets. Combining all these factors, demand was more robust and supply more constrained than we expected—resulting in stronger-than-expected economic growth and persistently higher inflation. Throughout all this, we adjusted monetary policy as the recovery advanced. We scaled back our quantitative easing, ending it in October 2021, and entered the reinvestment phase. We now purchase bonds only to keep our overall holdings stable as bonds mature. And while our exceptional forward guidance remained in place until a few weeks ago, we regularly updated our view of when the necessary conditions to raise interest rates would be met. On January 26, 2022, we removed forward guidance altogether, based on our assessment that slack in the economy had been absorbed. We expect that interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving our 2% inflation target. We indicated that, once we begin to raise the policy rate, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing bonds to roll off. Many of the factors that influenced our policy deliberations throughout the pandemic have come into sharper focus as we gain experience with a recession that is unlike any other. This illustrates why it’s so important to have decision-making processes that can adapt to new information, analysis and experience—which is what I’d like to talk about next. Our adaptable analytical and decision-making processes Much of what I have been discussing is not captured well by our standard economic models. Indeed, over time, we have adjusted our models so that they could relate even more to the unique circumstances of the COVID-19 pandemic. Bank of Canada economists have increasingly been drawing on novel sources of data to get a sense of what is happening on the ground. Real-time data have been especially valuable because the situation has been changing so rapidly. For example, online restaurant reservations and data from Interac on spending gave a more timely readout of consumer behaviour. Such data became particularly important as the pandemic drove many more customers to do their shopping and other activities online. Similarly, online job postings complemented other indicators we use to assess labour market conditions. During the pandemic, epidemiological data have also been essential—and we have been talking regularly with epidemiologists and public health officials to interpret these data. The uneven economic impacts of the pandemic further underscore the importance of looking at data broken down in various ways. This has allowed us to better assess how situations were affecting different groups of people in unequal ways and how this might affect economic outcomes on a larger scale. For example, we have increasingly been focusing on a wider range of labour market indicators and publishing them in our quarterly Monetary Policy Report and on our website. To make better use of all these data, our economists have been taking innovative approaches, including working with big data and advanced analytics. These new analytical tools and information sources have allowed us to fill important gaps in our understanding of what was happening in all parts of the economy. Events such as the pandemic also show the value of talking with and listening to Canadians. To quote Dr. William Osler again: Listen to your patient—he is telling you the diagnosis. For many years, we have carried out our quarterly Business Outlook Survey and maintained a regular dialogue with business leaders. This was instrumental, for example, to understanding the nature and extent of supply constraints in Canada. We now also conduct the Canadian Survey of Consumer Expectations four times a year which, amongst other things, helps us evaluate the extent to which consumer inflation expectations remain anchored. We are also pursuing a deliberate strategy of broadening the set of stakeholders we consult to sharpen our insights into the economy. More generally, turbulent times call for openness to new facts and ideas and agility in decision making. Uncertainty may require a cautious and gradual approach when entering uncharted territory—but as the pandemic has illustrated, there are times when policy-makers must act boldly. Any policy involves risk, but inaction is often riskier. It’s important to take those risks, but it’s equally important to fully understand them and be transparent in communicating their nature.4 When coming to a policy decision, the Bank looks at several risks and assesses their relative importance. Many risks are two-sided, but we may be more concerned about one side than the other. This has been particularly true during the pandemic. Given the magnitude of the impact at the beginning of the crisis, our concern about of the downside risks to the economy led us to deliver an aggressive monetary policy stimulus. As the situation evolved, however, our policy action shifted along with the balance of risks. Currently, with inflation well above our target, we are increasingly focused on countering the upside risks. At different stages in the pandemic we have changed our outlook and our policy stance to respond to the uncertain and fast-changing situation. What remained constant, See S. Kozicki and J. Vardy, “Communicating Uncertainty in Monetary Policy,” Bank of Canada Staff Discussion Paper No. 2017-14 (November 2017). however, was our commitment to explaining the basis for our projections and our decisions. We have been clear that we can’t be certain about many things. We have also been candid in describing the risks involved at any given moment. Although we cannot eliminate uncertainty, we can provide as much clarity as possible about the Bank’s actions and decision-making processes. This was clearly reflected in the conditions we included in our forward guidance throughout the pandemic. And it was in that spirit that we announced our decision in January, making it clear that with slack now absorbed, interest rates will need to be on a rising path to bring inflation sustainably back to the 2% target. Conclusion The pandemic has brought much that was unexpected. We have drawn on our analysis and experience to reach a clearer understanding of the forces at work, but we must anticipate the possibility of more surprises before this chapter is closed. While we now expect supply disruptions to ease and inflation to come down quickly in the second half of this year, we are alert to the risk that inflation may again prove more persistent. We will be nimble—and if necessary, forceful—in using our monetary policy tools to address whatever situation arises, as we have done throughout these turbulent times. We know that Canadians count on us to make the right decisions in the face of uncertainty and to navigate relentless change. And we will always work hard to be worthy of that confidence. Thank you.
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Remarks (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, to the CFA (Chartered Financial Analyst) Society Toronto, Toronto, Ontario, 3 March 2022.
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Remarks by Tiff Macklem Governor of the Bank of Canada CFA Society Toronto March 3, 2022 Toronto, Ontario (via webcast) Economic progress report: Controlling inflation Introduction It is a pleasure to be with you today to provide an economic update and to discuss both our monetary policy decision yesterday and what Canadians can expect from us going forward. Before I begin, I want to acknowledge the shocking developments that have taken place over the past week in Ukraine. The senseless loss of human life and the devastating impact of this unprovoked Russian invasion on the Ukrainian people are beyond comprehension. I know this is an extremely anxious time for the many Canadians who have family and friends in Ukraine, and my thoughts are with you. The invasion is also a major new source of uncertainty and volatility in the global economy. The situation is fluid, and we are following events closely and will be assessing the ongoing economic impacts. These events come just as we approach the two-year mark of the COVID-19 pandemic. The economic recovery from the pandemic has been impressive. While uncertainty about the evolution of the virus remains, the agility and resilience of Canadian households and businesses through the past two years of immense challenge cannot be overstated. And after providing extraordinary stimulus to support the economy through this tremendous shock, we are now clearly on a path to normalizing monetary policy. That’s what I’d like to discuss with you today. In January, when the Bank of Canada released its quarterly Monetary Policy Report, we told Canadians that the emergency monetary policy measures needed to support the economy through the pandemic were no longer required. We ended our exceptional forward guidance and told Canadians they should expect a rising path for interest rates. Yesterday, Governing Council took the decision to raise the policy interest rate by 25 basis points to 0.5%—a first step on that path. We also said we will be considering when to end the reinvestment I would like to thank Erik Ens and Grahame Johnson for their help in preparing this speech. Not for publication before March 3, 2022 12:00 pm Eastern Time -2phase of our large-scale asset purchases and allow the Bank’s holdings of Government of Canada bonds to begin to decline—a process known as quantitative tightening, or QT. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target. Today I will provide an update on economic developments, with a focus on inflation and the forces behind it. I will also review the role of monetary policy in bringing inflation back to target. Finally, I want to look ahead to the next phase of our balance sheet management and the mechanics of QT. Like so many things that have happened during the pandemic, this will be new territory for Canadians, and I want to ensure the process is clear and transparent ahead of time, so that everyone understands what comes next. Economic update since January The Canadian economy is robust. Growth of gross domestic product in the fourth quarter was very strong at 6.7%, reinforcing our view that economic slack in the economy has been absorbed. And growth in the first quarter of 2022 looks more solid than previously projected. As expected, inflation has remained high. Inflation control is our number one job at the Bank, so I want to explain what is driving these price increases and what Canadians can expect looking ahead. Since last spring, consumer price index (CPI) inflation has surged well above our target range of 1% to 3%. In January, CPI inflation was 5.1%. The Russian invasion of Ukraine is driving up international prices for oil, wheat and other commodities. This will put further upward pressure on inflation in Canada and around the world. Setting aside the crisis in Ukraine, the surge in inflation we have seen since last spring largely reflects pandemic-related shifts in global supply and demand. But this rise in inflation has been larger than we expected six months ago, and price increases have broadened. So I want to take a closer look at the forces at play. One indication of the unusual forces at play is the large gap that has opened up between different measures of core inflation. All three of our core measures have increased in recent months. CPI-common, which is more related to inflation in services and less influenced by global supply disruptions, was only 2.3% in January. In contrast, CPI-median and CPI-trim, which have been more influenced by the prices of globally traded goods, were 3.3% and 4.0%, respectively (Chart 1). -3Chart 1: Inflation measures are elevated % Year-over-year percentage change, monthly data -1 Total CPI CPI-common CPI-trim Sources: Statistics Canada and Bank of Canada calculations CPI-median Target Last observation: January 2022 The inflation story in Canada has three key elements. The first is the global shift toward goods and away from services during the pandemic, combined with pandemic-related disruptions to the production and delivery of goods. The second is a broadening of price increases to everyday items like food and energy, making it more difficult for consumers to avoid paying higher prices. And the third is the strength of the Canadian recovery and the overall balance between demand and supply in our economy. These elements are all interacting, but I’d like to take each in turn. In the two decades before the pandemic, goods price inflation was generally low—indeed, on average, well below our 2% target for overall inflation. This reflects a combination of factors. Innovation drove the prices of many goods lower, particularly for computers and other goods with embedded technology. Increasingly specialized and efficient global supply chains, together with reductions in international shipping costs, also put downward pressure on goods prices in Canada and around the world. In contrast, the prices of many in-person services that are necessarily more local and more labour-intensive saw larger price increases on average. Between 2015 and 2019, goods inflation averaged 1%, while services inflation, excluding shelter, averaged 2.4% (Chart 2). -4Chart 2: Goods inflation has risen dramatically % Year-over-year percentage change, monthly data -2 -4 Goods inflation Services inflation, excluding shelter Goods inflation (2015–19 average) Services inflation, excluding shelter (2015–19 average) Sources: Statistics Canada and Bank of Canada calculations Last observation: January 2022 The pandemic has dramatically shifted the relative pressures on the prices of goods and services. Stuck at home, Canadians—and indeed consumers in most countries—have spent less on services such as gym memberships or travel. As a result, many services prices have been rising more slowly than usual. In January, the rate of increase in prices of services, excluding shelter, was 1.6% in Canada. But, unable to buy the services they wanted, consumers have shifted to goods. Canadians have bought exercise bikes, office furniture and electronics to help cope with living, working and playing at home. This has put upward pressure on goods prices. Supply problems have substantially exacerbated the situation. Just as consumers were spending more on goods, the supply of these goods was squeezed as health concerns hit far-flung factories and ports became congested. Pandemic-related restrictions and precautions around the world have limited production and slowed the delivery of goods. The double whammy of higher demand and impaired supply has resulted in sharply higher prices for many goods. In January, goods price inflation in Canada was 7.2%. The last time it was that high was in January 1983, when overall inflation was 8.2%. As the pandemic recedes, we can expect consumers to shift back to spending more on services, and this should take some pressure off global demand for goods. We can also expect supply chains to normalize. But predicting how long this will take is difficult. And the war in Ukraine is compounding this difficulty, as it could also have implications for global supply chains. As you might expect, we have been working hard to better understand and track supply chain disruptions—our near-term outlook for inflation depends importantly on how they evolve. We’re closely tracking new and different sources of data that tell us more about shortages, logistics and shipping costs. What is clear is that supply chains remain highly disrupted. But the data also show us some tentative -5signs of improvement. Manufacturers in Canada are starting to receive inputs a little quicker (Chart 3), and global transportation bottlenecks have eased slightly (Chart 4). Canadian motor vehicle production has also begun to recover from slowdowns caused by shortages of semiconductors. But global shortages of key commodities remain a challenge. Overall, we expect global demand and supply of goods to gradually come into better balance through 2022. Chart 3: Disruptions remain significant, may be at peak levels Index PMI: Manufacturing suppliers’ delivery times, monthly data Canada United States Euro area Note: The Purchasing Managers’ Index (PMI) is a diffusion index of business conditions. An inverted index is used to show that a reading less than (greater than) 50 indicates an increase (decrease) in delivery times compared with the previous month. Last observation: February 2022 Source: IHS Markit via Haver Analytics Chart 4: Shipping costs and backlogs have eased but remain elevated Weekly data Index: 2019 = 100 Number of container ships waiting to dock 1,500 1,250 1,000 Port of Los Angeles and Port of Long Beach backlog (left scale) Shipping rate index, China to North American west coast (right scale) Sources: Freightos Baltic Index (FBX), the Marine Exchange of Los Angeles and Long Beach Harbors, Pacific Maritime Management Services and Bank of Canada calculations Last observation: February 13, 2022 The second element of the inflation story in Canada has been a broadening of inflation beyond items directly affected by supply chain disruptions. The bounceback in energy prices from pandemic lows has been contributing to inflation for -6more than a year, but a combination of strong demand growth, limited investment, and geopolitical risks has pushed oil prices well above pre-pandemic levels. This is boosting CPI inflation directly and is adding to already high transportation costs. These higher costs are affecting an increasingly broad spectrum of goods. In addition, extreme weather has reduced harvests in Canada and other key growing regions, and this is pushing up food prices. And in Canada, strong demand for housing combined with higher costs for building materials is pushing up new house prices, increasing the shelter component of CPI inflation. One way to measure this broadening of price pressures is to look at how many CPI components are seeing high rates of inflation. As of January, across 165 CPI components, almost two-thirds were growing above 3% (Chart 5). This includes gas and groceries—necessities whose prices Canadians see daily. Grocery prices are up 6.5% from last year, and everyday foods that are hard to substitute, such as beef, chicken and cereal, are all getting more expensive. Chart 5: Nearly two-thirds of CPI components are growing above 3% Share of CPI components growing above 3% on a year-over-year basis, monthly data % Sources: Statistics Canada and Bank of Canada calculations Last observation: January 2022 This broadening in price pressures is a big concern. It is making it more difficult for Canadians to avoid inflation, no matter how patient or prudent they are as shoppers. This is affecting more vulnerable members of society the most. It also increases the risk that households and businesses will begin to expect large price increases to continue and that this becomes embedded in long-term inflation expectations. The lesson from history is that if inflation expectations become unmoored, it becomes much more costly to get inflation back to target. So far, longer-term inflation expectations have remained well anchored, and Canadians can expect us to use our tools with determination to keep them that way. This brings me to the third element of the inflation story—the overall balance of demand and supply in the economy. As we indicated in January, a wide range of measures suggest economic slack has been absorbed. The spread of the Omicron variant was a tough way to start the year, with 200,000 jobs lost in -7January—mostly among the same services sector workers who have borne the brunt of pandemic layoffs all along. But other data have generally been robust, and with public health restrictions now easing, we expect strong growth to resume. With the economy just back to its potential output, the elevated inflation we are experiencing today is not the result of too much demand in the economy. But if we look ahead, with slack absorbed and considerable momentum in demand, we need higher interest rates to dampen spending growth so that demand does not run significantly ahead of supply. In practice, the three key elements driving inflation are interacting to push inflation up. But raising the policy rate will not fix supply chain disruptions, nor will it lower oil prices. What monetary policy can do is make borrowing more expensive, which slows domestic demand. For households and businesses that are already feeling the pinch of inflation, the higher cost of borrowing can be doubly painful. But tighter monetary policy is necessary to lower the parts of inflation that are driven by domestic demand. Tightening monetary policy is also needed to keep inflation expectations well anchored and to limit the broadening of inflationary pressures so that inflation falls back as supply disruptions ease. These three elements of the inflation story all weighed on our monetary policy decision announced yesterday. We expect inflation to come down in the second half of this year as the pandemic eases. But with inflation substantially above our target, we are more concerned about the upside risks to our inflation outlook. The broadening of price increases is making inflation harder to avoid and raises the risk that inflation expectations could drift higher. And with slack now absorbed, the momentum in demand means that monetary policy has a clear role to play in getting inflation back to our target. Against this backdrop, yesterday the Governing Council took the first step on the path to higher interest rates, raising our policy rate by 25 basis points to half a percent. This takes our policy rate off its effective lower bound for the first time since the end of March of 2020—almost two years. We will also be considering when to end the reinvestment phase of our large-scale asset purchases and allow our holdings of Government of Canada bonds to begin to shrink. The impact of raising our policy rate will be higher interest rates for Canadian households and businesses, including many mortgage and prime lending rates, but also rates for savings products. The economy is now in a place where moving to a more normal setting for interest rates is appropriate. The economy can handle it. We know this will be a significant adjustment, and we fully intend to tighten policy in a deliberate and careful way, being mindful of the impacts and monitoring the effects closely. The Bank is committed to returning inflation to the 2% target and keeping inflation expectations well anchored. Quantitative tightening I’d like to turn now to the second part of my remarks today. With the decision yesterday to raise the policy rate, ending reinvestment and moving to QT would be a natural next step. Before I explain how QT would work, let me review how we got here. When the pandemic hit in spring 2020, we undertook large-scale purchases of Government of Canada bonds, first to help restore market functioning and then to bolster our -8monetary policy stimulus. This program—known as quantitative easing, or QE— helped lower borrowing costs for households, businesses and governments by putting downward pressure on long-term interest rates.1 When QE began, we were buying at least $5 billion of Government of Canada bonds a week. Combined with exceptional forward guidance, QE lowered the interest rates on long-term bonds. But as the economic outlook improved, less QE stimulus was needed. In October 2020 we began reducing the pace of purchases, and in October 2021 we ended QE and entered the reinvestment phase. For the past four months we’ve kept the size of our holdings of Government of Canada bonds stable, purchasing only enough bonds to replace those that are maturing. When we initiate QT, we will stop purchasing Government of Canada bonds. From that point forward, maturing government bonds will not be replaced when they roll off the balance sheet. The Bank’s holdings and the maturity schedule of those bonds are published on our website, so the timing and pace of QT will be fully transparent. We do not intend to actively sell bonds. Relative to the balance sheets of most other central banks that have undertaken QE programs, ours has a shorter average term to maturity. Roughly 40% of our bond holdings mature within the next two years. This suggests that, other things being equal, our balance sheet would shrink relatively quickly. As our Government of Canada holdings mature and roll off, the level of settlement balances on our balance sheet, which currently stands at about $250 billion, will decline roughly in tandem.2 QT would complement increases in the policy rate, putting upward pressure on interest rates at maturities where households and businesses typically borrow. But let me underline that our primary tool is the policy interest rate, and adjustments to the pace and timing of the removal of monetary stimulus will focus on our policy rate. This reflects several considerations. Changing the policy rate to speed or slow the economy has a long history, and interest rate changes are easier to calibrate and communicate. Our policy rate is a nimble tool, and we have used it to deliver low, stable and predictable inflation since the Bank of Canada began inflation targeting in 1991. Changing the policy rate will therefore 1 See P. Beaudry, “Our Quantitative Easing Operations: Looking Under the Hood” (speech delivered virtually to the Greater Moncton Chamber of Commerce, the Fredericton Chamber of Commerce and the Saint John Region Chamber of Commerce, Fredericton, Moncton, Saint John, December 10, 2020). 2 The level of settlement balances was near zero before the pandemic. For a variety of reasons, including investor preferences shifting toward safe and liquid assets, changes to the payment system in Canada, and regulatory changes that encourage the greater use of central bank deposits, the appropriate level of settlement balances will likely be higher than it was before the pandemic, although still much lower than it is now. When the Bank approaches that lower level, it can be expected to once again start traditional modest bond purchases to accommodate its normal course of operations. See T. Macklem, “Economic Progress Report: Monetary Policy for the Recovery (speech delivered virtually to Fédération des chambres de commerce du Québec, Montréal, September 9, 2021). -9remain our most important monetary policy tool. And as we said in January, Canadians should expect a rising path for interest rates. Conclusion Let me conclude. These are anxious times. The Russian invasion of Ukraine is deeply troubling and has injected new uncertainty. This comes atop continued uncertainty about the evolution of COVID-19, even as the world makes its way out of the Omicron variant. Supply chain disruptions also continue, distorting the price and availability of many goods. All of these issues featured prominently in our deliberations leading to yesterday’s decision, and we will need to manage through them. But slack in the economy is absorbed, there is solid momentum, and inflation is too high. Putting it all together, yesterday the Bank took the first step on a path to normalizing monetary policy in Canada. And moving forward, Canadians can be confident that we will continue to act to deliver on our mandate. Thank you.
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Opening statement (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 3 March 2022.
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Tiff Macklem: Opening statement before the House of Commons Standing Committee on Finance Opening statement (delivered virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 3 March 2022. * * * Introduction Good afternoon. Thank you for inviting me here as part of your study on inflation in Canada. I’m pleased to have Senior Deputy Governor Carolyn Rogers with me for her first appearance before this committee. Since I was last here, the Bank of Canada and the Government of Canada renewed our joint agreement on Canada’s monetary policy framework. We agreed that the primary objective of monetary policy is price stability. Under the 2022–26 agreement, the cornerstone of our framework remains the 2% inflation target, at the midpoint of a 1% to 3% control range. And earlier today I spoke to the CFA Society Toronto, where I explained our policy decision yesterday to raise our policy interest rate by 25 basis points to half a percent. I also reviewed the drivers of the recent rise in inflation globally and in Canada. I know this is directly relevant to your study, so I have given my remarks to the Clerk to share with committee members. I look forward to further exploring these issues with you today. Before moving to your questions, I’d like to talk to you—and Canadians—about three things. First, I’d like to review the Bank of Canada’s actions over the course of the pandemic: what we were trying to achieve, what happened and what would have happened if we hadn’t acted. Second, I want to speak to the concerns many Canadians have about the rising cost of living. I know many people are worried about prices at the gas pump and the cost of groceries, housing affordability and how to save enough for retirement. And that angst has been compounded by everything we’ve gone through over the past two years of this pandemic. Third, I want to talk about what’s next. This latest wave of the pandemic is fading, and life is starting to return to normal—or a new normal. I want to share what Canadians can expect to see in the economy, with inflation and from the Bank. The Bank of Canada’s actions At the onset of the pandemic, uncertainty skyrocketed, financial markets seized up and economic activity fell off a cliff. About 3 million Canadians lost their jobs and more than 3 million people found themselves working less than half of their normal hours. Businesses closed shop in record numbers. Inflation fell sharply, even dropping into negative numbers. We were staring down another Great Depression and the possibility of deflation. Deflation happens when prices across the economy actually fall. While this might not sound bad, the truth is that persistent deflation is dangerous. When unemployment rises rapidly and overall prices begin to fall, households may reduce spending if they think that goods and services will become even cheaper in the future. But putting off spending results in less demand, leading to more job losses and more business closures. And this puts more downward pressure not only on prices but also on wages. Both can spiral downward, as they did in Canada during the Great Depression. Deflation also makes repaying debt more expensive—which could have been a severe problem for a country like Canada, with high levels of household debt. 1/3 BIS central bankers' speeches So when the pandemic began and we were facing economic calamity, we took extraordinary actions. We lowered our policy interest rate as low as we could. We promised not to raise interest rates until slack in the economy was fully absorbed, and we reinforced this commitment using quantitative easing. Taken together, these actions kept borrowing rates low to stimulate spending and instilled much-needed confidence in the economy so that businesses and households could recover. Thanks to the resilience of Canadians, effective vaccines, exceptional fiscal policy and the Bank’s actions, Canada avoided deflation and our economy has recovered. Canadians are anxious But I recognize that this reassurance may not reflect how many are feeling. Even before the pandemic, many Canadians were worried about how they were faring economically. Not everyone was experiencing the benefits of a growing economy and a healthy labour market. The pandemic intensified people’s concerns, layering worries about their health and that of their loved ones on top of uncertainty about jobs and businesses, the value of their savings and their prospects for retirement. Reopening the economy has brought new complications, leading to higher inflation around the world and here at home. The COVID-19 virus continues to circulate and mutate. We are seeing social upheaval here in Canada and in other countries. And in the last week, shocking developments have unfolded in Ukraine at great human cost. The unprovoked Russian invasion is also creating volatility and uncertainty in the global economy. We are living in anxious times. Needless to say, monetary policy is not equipped to address most of these issues. But it is equipped and mandated to control inflation. Here in Canada, inflation is just above 5%. That’s too high. And with oil prices rising further in recent weeks, we can expect inflation to move up again. I am sure people are wondering why prices are so high, so let’s unpack it. The inflation story in Canada has three key elements. The first is that, through the pandemic many people shifted to buying more goods and fewer services. At the same time, the pandemic disrupted the production and delivery of many items. This has caused the prices of many globally traded goods to rise sharply. The second is that price increases have seeped into an increasingly wide array of goods, including everyday items like food and energy. Oil prices are higher because of strong demand, limited investment in new production and geopolitical tensions. This means higher transportation costs, which further add to the price pressures on goods. Food prices are also being affected by extreme weather that has reduced harvests. And strong demand for housing, in the face of limited supply, has pushed those prices up. The third is the strength of the recovery in Canada and the overall balance between demand and supply in our economy. The inflation we are experiencing today is not because of overall excess demand in the economy. A wide range of indicators suggest that slack in the economy has just now been absorbed. But as we look ahead, spending growth needs to moderate so that demand does not significantly outpace supply and create a new domestic source of inflation. So we need to tighten monetary policy—or, to put it more simply, raise interest rates—to help control inflation. Where do we go from here? 2/3 BIS central bankers' speeches Let me wrap up by explaining what Canadians can expect from us going forward. Monetary policy has a clear role in keeping supply and demand in balance and getting inflation back to target. To this end, we have taken deliberate steps to adjust the degree of monetary policy stimulus as the economy recovered—slowing our quantitative easing and then stopping it outright last October. And we made it clear to Canadians in January that, with the economy operating at capacity, our guarantee of rock-bottom rates had ended. We need higher interest rates to bring inflation sustainably back down and keep the economy in balance. Yesterday, Governing Council took the decision to raise the policy interest rate by 25 basis points to half a percent. And we indicated that we expect interest rates will need to rise further. We also said that we will be considering when to end the reinvestment phase of our large-scale asset purchases and allow the Bank’s holdings of Government of Canada bonds to begin to shrink. This is a process known as quantitative tightening, or QT. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% target. In closing, I want to emphasize to all Canadians that the Bank is determined to control inflation. With that, Senior Deputy Governor Rogers and I will be happy to take your questions. 3/3 BIS central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 13 April 2022.
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Tiff Macklem: Opening statement before the Monetary Policy Report Press Conference Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the Monetary Policy Report Press Conference, Ottawa, Ontario, 13 April 2022. * * * Good morning. I’m pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today’s policy announcement and the Bank of Canada’s Monetary Policy Report (MPR). Russia’s unprovoked invasion of Ukraine is causing enormous human suffering, and our hearts go out to the Ukrainian people. The war has also introduced a major new source of uncertainty to the global outlook, and it is boosting already high inflation in many countries, including Canada. Against this background we have three main messages this morning. First, the Canadian economy is strong. Overall, the economy has fully recovered from the pandemic, and it is now moving into excess demand. Second, inflation is too high. It is higher than we expected, and it’s going to be elevated for longer than we previously thought. Third, we need higher interest rates. Our policy interest rate is our primary tool to keep the economy in balance and bring inflation back to the 2% target. This morning we raised our policy rate by 50 basis points to 1%. And we indicated Canadians should expect further increases. Let me expand on each of these three themes. Recent data suggest the Canadian economy weathered the Omicron variant of COVID-19 remarkably well, and the economy has considerable momentum going into the second quarter. A broad set of indicators suggests that our economy is now moving into excess demand. The labour market shows this clearly. Job growth has been strong, the unemployment rate is at a record low, job vacancies are elevated, and wage growth has reached pre-pandemic levels. Businesses are also telling us they expect they’ll need to increase wages further to keep and attract workers. Looking forward, momentum in most major spending components points to strong growth in gross domestic product this year. Canadians are spending more on services as public health measures ease and spending on goods remains solid. Housing activity has remained strong and is expected to moderate, but to still-elevated levels. Business investment and exports are both picking up, and higher prices for many of the commodities Canada exports are bringing more income into the country. Higher interest rates should moderate growth in domestic spending as we move through this year and next. At the same time, Canada’s productive capacity should be helped by robust business investment, improved labour productivity and higher immigration. Putting this all together, the Bank forecasts the Canadian economy will grow 4¼% this year, before moderating to 3¼% in 2023 and 2¼% in 2024. The Bank’s primary focus is inflation. We are acutely aware that already-high inflation has risen further above our target. The invasion of Ukraine has driven up the prices of energy and other commodities, and the war is further disrupting global supply chains. We are also concerned about the broadening of price pressures in Canada. With about two-thirds of consumer price index (CPI) components growing above 3%, Canadians are feeling inflation across their household budgets, from gas to groceries to rent. 1/3 BIS central bankers' speeches CPI inflation in Canada hit a three-decade high of 5.7% in February, above what we projected in the January MPR. We now expect inflation to average almost 6% in the first half of 2022 and remain well above our 1% to 3% control range throughout this year. We then expect it to ease to about 2½% in the second half of 2023 before returning to the 2% target in 2024. With inflation broadening and remaining higher for longer, the risk is that Canadians start to think that high inflation will become entrenched. This brings me to my third point—interest rates are increasing. Raising the policy rate is the main tool the Bank has to moderate demand, prevent a persistent buildup in domestic price pressures and keep inflation expectations moored on the 2% target. The economy can handle higher interest rates, and they are needed. Increases in the Bank’s policy rate raise the interest rates that banks and other lenders charge their customers. These include the rates on business loans, consumer loans and mortgage loans. With increases in the policy rate, interest paid on savings products will move up as well. By making borrowing more expensive and increasing the return on saving, a higher policy interest rate dampens spending, reducing overall demand in the economy. And with demand starting to run ahead of the economy’s supply capacity, we need that to happen to bring the economy into balance and cool domestic inflation. We also need higher interest rates to keep Canadians’ expectations of inflation anchored on the target, so that as global inflationary pressures from higher oil prices and clogged supply chains abate, inflation in Canada falls back toward the target. We are committed to using our policy interest rate to return inflation to target and will do so forcefully if needed. Let me now say a few words about the Governing Council’s deliberations. We of course discussed the economic impact of the invasion of Ukraine. The war has led to higher and more volatile energy prices. The war has also disrupted trade, increased uncertainty and caused volatility in financial markets. This will weigh on global growth, particularly in eastern Europe. The impact of the war on growth in Canada is likely to be small for two reasons. First, our economic links to Ukraine and Russia are very limited. And second, while the war has reduced global growth overall, it has increased the demand and prices for commodities we produce and export, such as oil, potash and wheat. We spent considerable time discussing the impact of higher inflation on Canadians and on their inflation expectations. People are increasingly expecting inflation will be higher for longer. But they continue to see inflation coming down, and their longer-term inflation expectations are still anchored on the 2% target. Finally, we discussed the impact of increasing our policy interest rate. While we have been clear that Canadians should expect a rising path for interest rates, seeing their mortgage payments and other borrowing costs increase can be worrying. We will be assessing the impacts of higher interest rates on the economy carefully. We also discussed where rates might end up—how high will they need to go? I know many Canadians have the same question. So let me share the Governing Council’s thinking. Canadians should expect interest rates to continue to rise toward more normal settings. By more normal we mean within the range we consider for a neutral rate of interest that neither stimulates nor weighs on the economy. The neutral interest rate isn’t something we can measure directly. We have to estimate it. And our estimate is between 2% and 3%. Today we raised the policy rate to 1%, still well below neutral. This is also below the pre-pandemic policy rate of 1.75%. 2/3 BIS central bankers' speeches It is important to remember that we have an inflation target, not an interest rate target. This means Governing Council is not on autopilot to a pre-set destination for the policy interest rate. How high rates go will depend on how the economy responds and how the outlook for inflation evolves. The economy has entered this period of excess demand with considerable momentum and high inflation, and we are committed to getting inflation back to target. If demand responds quickly to higher rates and inflationary pressures moderate, it may be appropriate to pause our tightening once we get closer to the neutral rate and take stock. On the other hand, we may need to take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target. We will of course be updating our views on the outlook for the economy and inflation as new data come in, and we will continue to share our assessments so Canadians can make informed decisions. Let me conclude with a brief word on quantitative tightening. We expanded our balance sheet during the pandemic, first to help restore financial market functioning and provide liquidity to the financial system, and then to add further stimulus to support recovery. Last November, we stopped increasing our holdings of Government of Canada bonds and have been in the reinvestment phase since then. Today we announced that we are entering the next phase, quantitative tightening, or QT. Effective April 25, we will stop purchasing Government of Canada bonds to replace our holdings as they mature, so our balance sheet will shrink. This will put upward pressure on borrowing costs further out on the yield curve, complementing the increases to our policy interest rate. Let me stop here. Senior Deputy Governor Rogers and I will be happy to take your questions. 3/3 BIS central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the Standing Senate Committee on Banking, Trade and Commerce, Ottawa, Ontario, 27 April 2022.
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Tiff Macklem: Opening statement before the Standing Senate Committee on Banking, Trade and Commerce Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the Standing Senate Committee on Banking, Trade and Commerce, Ottawa, Ontario, 27 April 2022. * * * Good evening. I’m pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcement and the Bank of Canada’s Monetary Policy Report (MPR). We published our MPR as Russia’s unprovoked invasion of Ukraine entered its eighth week. The war is causing tremendous human suffering, and our hearts go out to the Ukrainian people. The war has also injected new uncertainty into the global economic outlook. It is boosting already high inflation in many countries, including Canada, and it is disrupting the global recovery from the COVID-19 pandemic. Against this backdrop we have three main messages. First, the Canadian economy is strong. Overall, the economy has fully recovered from the pandemic, and it is now moving into excess demand. Second, inflation is too high. It is higher than we expected, and it’s going to be elevated for longer than we previously thought. Third, we need higher interest rates. Our policy interest rate is our primary tool to keep the economy in balance and bring inflation back to the 2% target. Two weeks ago, we raised our policy rate by 50 basis points to 1%. And we indicated Canadians should expect further increases. Let me expand on each of these three themes. Canadians have been through a lot in the past two years. Everyone has been touched by the pandemic, through illness or the loss of loved ones, fear and uncertainty, job loss or business closure. We experienced the sharpest and deepest recession on record. And repeated waves of the virus have made the recovery bumpy. Thanks to exceptional monetary and fiscal stimulus, effective vaccines and a willingness to adapt and innovate, the economy has bounced back remarkably quickly. It has been the fastest and sharpest recovery ever. And now demand is beginning to run ahead of the economy’s productive capacity. The labour market shows this clearly. Before the pandemic, Canada’s unemployment rate was 5.7%. When the pandemic hit, it quickly soared to 13.4%. And now, two years later, it is at a record low 5.3%. Job vacancies are elevated, and wage growth has reached pre-pandemic levels. Businesses can’t find enough workers to meet demand and they are telling us they’ll need to raise wages to attract and retain staff. We expect strong growth to continue in the months ahead. As remaining public health restrictions ease, Canadians are spending more on services—travel and recreation, lodging and restaurants. And we’re still buying a lot of goods. Housing activity is still strong, and while we expect it to moderate, it will remain elevated. Business investment and exports are both picking up, and higher prices for many of the commodities Canada exports are bringing more income into the country. Robust business investment, improved labour productivity and higher immigration should help 1/3 BIS central bankers' speeches boost the economy’s productive capacity. And higher interest rates will slow spending. Putting this all together, the Bank forecasts the Canadian economy will grow 4¼% this year, before moderating to 3¼% in 2023 and 2¼% in 2024. That brings me to my second point—the Bank’s primary focus is inflation. Consumer price index (CPI) inflation in Canada hit a three-decade high of 6.7% in March, well above what we projected in the January MPR. The war has driven up the prices of energy and other commodities, and it is further disrupting global supply chains. While most of the factors pushing up inflation come from beyond our borders, with the economy in excess demand, we are facing domestic price pressures too. About two-thirds of CPI components are growing above 3%, which means Canadians are feeling inflation across their household budgets, from gas to groceries to rent. Our latest outlook is for inflation to average almost 6% in the first half of 2022 and remain well above our 1% to 3% control range throughout this year. We then expect it to ease to about 2½% in the second half of 2023 before returning to the 2% target in 2024. High inflation affects everyone. Inflation at 5% for a year—or 3 percentage points above our target —costs the average Canadian an additional $2000 a year. And it is affecting more vulnerable members of society the most, both because they spend all their income and because prices of essential items like food and energy have risen sharply. This broadening in price pressures is a big concern. It makes it more difficult for Canadians to avoid inflation, no matter how patient or prudent they are as shoppers. This brings me to my third point—interest rates are increasing. The economy needs higher rates and can handle them. With demand starting to run ahead of the economy’s capacity, we need higher rates to bring the economy into balance and cool domestic inflation. We also need higher interest rates to keep Canadians’ expectations of inflation anchored on the target. We can’t control or even influence the prices of most internationally traded goods. But if Canadians’ expectations of inflation stay anchored on the 2% target, inflation in Canada will come back down when global inflationary pressures from higher oil prices and clogged supply chains abate. We are committed to using our policy interest rate to return inflation to target and will do so forcefully if needed. Increases in the Bank’s policy rate raise the interest rates on business loans, consumer loans and mortgage loans—and they increase the return on savings. We have been clear that Canadians should expect a rising path for interest rates, but seeing their mortgage payments and other borrowing costs increase can be worrying. We will be assessing the impact of higher rates on the economy carefully. We recognize everyone wants to know where rates might end up—how high they will need to go. It is important to remember that we have an inflation target, not an interest rate target. This means we do not have a pre-set destination for the policy interest rate. But I can say that Canadians should expect interest rates to continue to rise toward more normal settings. By more normal we mean within the range we consider for a neutral rate of interest that neither stimulates nor weighs on the economy. We estimate this rate to be between 2% and 3%. Two weeks ago, we raised the policy rate to 1%, still well below neutral. This is also below the pre-pandemic policy rate of 1.75%. How high rates go will depend on how the economy responds and how the outlook for inflation evolves. The economy has entered excess demand with considerable momentum and high inflation, and we are committed to getting inflation back to target. If demand responds quickly to higher rates and inflationary pressures moderate, it may be appropriate to pause our tightening once we get closer to the neutral rate and then take stock. On the other hand, we may need to 2/3 BIS central bankers' speeches take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target. Finally, let me a say a word about our balance sheet. As of this week, we are no longer replacing maturing Government of Canada bonds with new ones, so our balance sheet will shrink. This brings our exceptional monetary policy response full circle. When the economy needed exceptional support in the depth of the recession, we lowered our policy rate to its lower bound and complemented this with quantitative easing or QE. Last November we ended QE and began reinvestment. We have now moved to quantitative tightening or QT. With the economy fully recovered, it is time to normalize our balance sheet. QT will complement increases in our policy rate by putting upward pressure on longer-term interest rates. Let me stop here. Senior Deputy Governor Rogers and I will be happy to take your questions. 3/3 BIS central bankers' speeches
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Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, to Women in Capital Markets, Toronto, Ontario, 3 May 2022.
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Carolyn Rogers: The Bank of Canada: a matter of trust Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, to Women in Capital Markets, Toronto, Ontario, 3 May 2022. * * * Introduction Good afternoon, and thank you for taking time out of your day to join me. I’m delighted to be here and honoured to speak to Women in Capital Markets. Your goal of accelerating equity and inclusion in the financial industry is one the Bank of Canada shares, and it’s one near to my heart. This is my first speech since joining the Bank. It’s also the first in-person speech by a member of Governing Council since the onset of the COVID-19 pandemic. Incidentally, the last in-person speech by the Bank was also to your organization in March 2020, right before society—and the economy—shut down. There’s just something about being able to speak in person that makes it easier to connect—to build trust and credibility. And that’s exactly what I’d like to talk about today: trust and credibility. These are two things that are vitally important to central banks, and two things the Banks of Canada works very hard to achieve. A central bank isn’t like a commercial bank where you can walk into a branch and open an account. We talk about things that can seem abstract to most people—growth, output, productivity. And our decisions take time and have to work through other parts of the economy before they directly affect Canadians. We can seem a little mysterious. But mysterious is not what we’re aiming for. What we’re aiming for is trust. We believe we earn the trust of Canadians by clearly explaining ourselves and by following through on our commitments. And we know that the better Canadians understand our goals, the more likely we are to achieve them. Public trust is fundamental to our ability to deliver on our mandate. So we are acutely aware that, with some of the extraordinary actions we have taken during the pandemic and with inflation well above our target, some people are questioning that trust. Tough questions, added scrutiny and informed debate are entirely appropriate in the current environment. We welcome them as an opportunity to engage with Canadians about what we do, how we do it and how we can improve. We also know that some Canadians are questioning whether their central bank is independent, whether it is accountable and whether it’s acting in their best interests. I’d like to respond directly to those questions today. Independence Let me start with independence. We know this is important to Canadians. They tell us consistently—through surveys, focus groups and other consultations—that they want their central bank to be independent of any commercial or political influence, and to act clearly in their best interests. 1/7 BIS central bankers' speeches It may not be obvious why such independence matters, but it’s important. Central banks that provide public benefits—like low inflation, financial stability and secure forms of payment—should not be influenced by commercial interests. With respect to political influence, governments have many public policy priorities—health, education, industry and trade, for example. Sometimes those policy pursuits can come into conflict with a central bank’s core mandate of ensuring low and stable inflation. That’s another reason why independence matters. The desire to have a public entity separate from both the banking sector and the political process, whose job is to guide the economy in the long-term best interests of its citizens, is what’s behind the existence of central banks around the world. And it’s what led to the creation of the Bank of Canada in 1934. The Bank of Canada Act established the Bank as a special type of Crown corporation with considerable independence to carry out its responsibilities. The Act sets out our “business and powers” as they relate to our core responsibilities of monetary policy, financial stability, currency, funds management and, more recently, retail payments supervision. But the legislation also protects the Bank’s operational independence to carry out activities to meet our responsibilities, free of political influence. Put differently, the Act dictates what we do, but not how we do it. And over the years, the Bank has made important changes to how we achieve our mandate. The most important came in 1991 when the Government of Canada and the Bank introduced the country’s first inflation-targeting agreement. This is exactly what it sounds like—a form of contract between the Bank and the government that lays out a target level for inflation but gives the Bank the decision-making authority to achieve it. Canada was an early adopter of inflation targeting as an approach to improving monetary policy outcomes. Prior to the introduction of inflation targeting, the Bank of Canada and other central banks around the world experimented with a number of ways to provide economic and price stability, such as fixed exchange rates and controlling the supply of money. But a period of high and volatile inflation through the 1970s and early 1980s prompted central bankers and other economists to search for a better approach. In Canada, for example, between 1974 and 1981, inflation started at 12%, dropped below 6%, then shot back up to more than 12%. So after a considerable amount of research and reflection, the Bank and the government of the day adopted their first inflation-targeting agreement. This framework has been renewed at regular intervals ever since, most recently just last year following extensive consultations. At each renewal, the government and the Bank agree on the monetary policy objectives for Canada. Over the years there have been some adjustments to the agreement, but the fundamental principles have remained the same. And that’s because it has worked. In the 30 years since the first agreement was signed, inflation has averaged almost exactly 2%. As a result of that stability, Canadians’ expectations have become solidly anchored on the inflation target. Our monetary policy framework is one important way we put our independence into practice. But 2/7 BIS central bankers' speeches there are others. The Bank has a Board of Directors made up of the Governor, Senior Deputy Governor and 12 independent directors. The Board doesn’t get involved in monetary policy decisions—that’s the work of Governing Council—but it does provide oversight of the Bank’s operations and finances. And the independent directors recommend the appointment of both the Governor and Senior Deputy Governor, for approval by Governor in Council. The Bank also has financial independence. Our expenditures are funded through our own operations rather than an appropriation from the government. And our budget is approved by our Board of Directors. The Bank’s employees are subject to policies set by the Bank and approved by the Board, not by federal public service agencies. And finally, the Governor and I both serve fixed, seven-year terms. This provides a measure of continuity over economic cycles—not electoral cycles—and allows for decision making that considers the long-term economic interests of Canadians. Taken together, these measures mean that the Bank has the necessary room to act independently, to take a long-term view and to make the decisions it judges best meet the economic interests of Canadians. But this independence does not mean we act without accountability. Accountability Like our independence, the Bank of Canada’s accountability is anchored in our governing legislation. T he Bank of Canada Act requires that we are audited annually by two independent firms, simultaneously. We are the only federal Crown corporation with this requirement. The Act also provides the Minister of Finance with the authority to enlarge the scope of audits, conduct special audits and request special reports. And the Auditor General of Canada has legal authority to investigate and audit the Bank’s activities and records in relation to its role as fiscal agent for the Government, agent for management of the Government’s debt and agent for the Exchange Fund Account. The Bank of Canada Act also makes it clear that if the Minister of Finance and Governor of the Bank of Canada ever have a difference of opinion on a monetary policy action, the Minister has the power, after consulting with the Governor and obtaining approval from the Governor in Council, to direct the Bank through a written directive tabled in Parliament. This is an important assurance of ultimate democratic accountability. And it is a testament to our track record—and to the respect that consecutive governments have shown for the Bank’s independence—that this power has never been exercised. The Board of Directors is another important check and balance. They provide oversight of the Bank’s management and administration, and they review our corporate policies, plans and annual budget. And as I mentioned earlier, the Governor and I both serve fixed seven-year terms, meaning we’re around long enough to be held accountable for our decisions. 3/7 BIS central bankers' speeches We appear regularly before committees of the House of Commons and Senate, where representatives can question us on any of our functions or decisions. And just as our monetary policy framework serves as a cornerstone to our independence, it is also a cornerstone to our accountability. The 2% target serves as a clear, measurable objective. The consumer price index is published monthly by Statistics Canada, so Canadians can easily track how we are performing against that objective. The Bank also demonstrates accountability through our public communication. In 1995 we began publishing a Monetary Policy Report (MPR) to provide detailed economic forecasts twice per year. We now publish our MPR quarterly, and we have continually increased the amount of data and level of detail we make available to support the projections you find in the MPR. In 2000 we moved to a system of eight fixed dates for announcing our policy rate decision. Over the years we have enhanced the amount of information that comes with these decisions. Four of our policy rate decisions each year are accompanied by an MPR and a press conference where the Governor and I explain how our forecast guided our deliberations and decision. The other four decisions are accompanied by a speech from a member of the Governing Council, discussing our outlook and explaining our decision. For all eight decisions, we publish a press release and take questions from the media. Beyond our policy announcements, the Bank is always looking for ways to engage with Canadians. My colleagues and I deliver about 20 public speeches each year across Canada, discussing different aspects of the Bank’s work. And the Bank speaks directly with individual Canadians and businesses about a wide variety of economic issues. We use their feedback as input to our policy deliberations, to enhance our research and to improve our communication. Listening makes us better at our job and better at explaining our job in a way that makes sense to Canadians. Trust in uncertain times So far, I have provided a bit of history and some important facts to explain how the Bank’s independence and accountability are embedded in legislation, and how they work in practice. What I would like to do now is describe how the Bank put its independence and accountability to work over the past two years to support Canadians through the pandemic. To do that, I need to go back in time to a little more than two years ago. The Canadian economy—indeed, the global economy—had been suddenly shut down to deal with a health emergency. Nearly six million Canadians lost their job or found themselves working less than half of their normal hours. Inflation fell sharply, dropping into negative territory. It wasn’t clear at that point how long this extraordinary situation would last or whether it might get even worse. Financial markets froze. There was talk of another Great Depression. The Bank of Canada, and central banks around the world, intervened quickly, providing emergency liquidity to keep the financial system functioning so households and businesses could continue to access credit. This is one of the core functions of central banks: to restore stability to markets in times of crisis and provide liquidity when others won’t.1 4/7 BIS central bankers' speeches Governments around the world also intervened swiftly, providing immediate support to businesses that had to close and to people who lost their income. The combined efforts of central banks and governments helped stabilize the economy and ensure that, on top of an unparalleled health crisis, the world would not also have to face a financial crisis. But as the pandemic wore on, it became clear that the Canadian economy would need more support to recover from the initial shock and to avoid greater hardships for individuals and businesses. The Bank had already lowered its policy rate as low as it could go to make borrowing cheaper for Canadian consumers and business, and to stimulate the economy. So the Bank committed to keeping the policy rate at 25 basis points until the economy recovered. The Bank also initiated quantitative easing (QE) to complement a very low policy rate. Through QE, the Bank bought government bonds to push down long-term interest rates—those that matter for household mortgages and business loans. All of these steps—lowering the policy rate, purchasing government bonds and committing to keep rates low until the economy recovered—were taken to support Canadians. They were not done to help commercial banks, nor were they done to fund government spending. They were done to lower the cost of borrowing for Canadians, to provide the economy muchneeded stimulus at a time when it was facing a once-in-a-generation downturn. Throughout this period of extraordinary policy action, the Bank ramped up its approach to policy transparency and clear communication. We explained our policy actions as clearly as we could for Canadians. We talked about how these actions worked, what their impact would be, what the conditions would be to exit them and how to judge their effectiveness. We were transparent about our asset purchase programs, regularly reporting the holdings on our balance sheet. We set up a dedicated webpage where the terms and conditions, and results of each purchase operation, were made available. And once we ended our purchase programs, we published full transaction-level details. These steps were all designed to make sure the public could follow our actions, and trust that we were doing what we said we’d do. Maintaining public trust takes on a whole new imperative in situations like the COVID-19 pandemic when uncertainty is unusually high. The Governor talked about this in a speech in the early days of the pandemic—how it was more important, yet at the same time more difficult, for central banks to be trusted sources of information and analysis in times of crisis.2 Trust is often tested in a crisis, and there is no question that central banks have been tested by the unpredictability brought on by the pandemic. Our work relies on having a clear view of the future so we can generate our outlook for the economy and inflation. A clear view of the future has been hard to come by for anyone these last two years, and there were some things we got wrong. The intensity and persistence of supply chain disruptions have surprised us. What started as narrowly focused problems in a few key products—like computer chips—has spread to a wide range of goods. The invasion of Ukraine intensified supply chain problems and pushed up commodity prices and inflation worldwide. And large parts of China are now under a renewed lockdown, causing further supply issues, transportation backlogs and uncertainty. 5/7 BIS central bankers' speeches These are things we didn’t foresee. We know we have a ways to go before Canadians can fully judge the success of our actions. There is still work to do. The job is not complete. We will continue to focus on building and maintaining the trust of Canadians, and we know Canadians will continue to hold us to account. Trust in times ahead Now, I’d like to wrap up by saying a few words about where we are today and what Canadians can expect from us going forward. The good news is the economy has recovered remarkably fast. As public health measures ease, Canadians are spending more. Business investment and exports are both picking up, and higher prices for the commodities we export means more revenue coming into Canada. Job growth is strong, wage growth has returned to pre-pandemic levels and the unemployment rate is at a record low. There are now almost twice as many vacant jobs as there were before the pandemic, which means wages are likely to increase as businesses compete for workers. The bad news is that Canadians are facing high inflation for the first time in more than three decades. With inflation running close to 7% and spreading to more and more everyday items, it’s squeezing budgets for families and putting pressure on businesses. High inflation here in Canada and around the world largely results from global pressures such as supply chain disruptions and elevated commodity prices. But with the Canadian economy starting to overheat, we can’t let demand get too far ahead of supply or we risk adding further to inflation. That is why the Bank has taken concrete and decisive actions. We raised our policy rate and started the process of quantitative tightening—letting the bonds we purchased over the course of the last two years mature and roll off our balance sheet. Interest rates remain low, but they are rising, and they will need to move higher still. These actions will moderate domestic demand so that a buildup in domestic prices doesn’t add to the inflationary pressures in Canada that are coming from global factors. Raising the policy rate will help moderate spending and rein in inflation. It will make borrowing costs more expensive, and we understand this has many Canadians worried. We will be watching closely to see how the economy responds to higher interest rates. We’re not on autopilot. We will be looking for signs that the economy is returning to balance. Just as Canadians trusted us to respond with strength and conviction when the economy needed support at the onset of the pandemic, they are counting on us now to lower inflation. We take that trust seriously. We have the tools, we have the track record, and we are committed to getting inflation back to target. Let me stop here. You’ve been an attentive audience, but an important part of being transparent and accountable is listening, and taking questions. So that’s what I’d like to do now. Thank you. 6/7 BIS central bankers' speeches 1 1. T. Gravelle, “Market Stress Relief: The Role of the Bank of Canada’s Balance Sheet” (speech delivered virtually to CFA Society Toronto, Toronto, Ontario, March 23, 2021). 2 2. T. Macklem, “The Imperative for Public Engagement” (speech delivered virtually to the Federal Reserve Bank of Kansas City Jackson Hole Symposium, Jackson Hole, Wyoming, August 27, 2020). 7/7 BIS central bankers' speeches
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Remarks by Mr Lawrence L Schembri, Deputy Governor of the Bank of Canada, to the National Aboriginal Capital Corporations Association, Gatineau, Quebec, 5 May 2022.
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Remarks by Lawrence Schembri Deputy Governor National Aboriginal Capital Corporations Association May 5, 2022 Gatineau, Quebec Economic reconciliation: Supporting a return to Indigenous prosperity I would like to begin by acknowledging that the land on which we gather is the unceded, traditional territory of the Algonquin Anishinaabe. I would also like to recognize that today is the National Day of Awareness and Action for Missing and Murdered Indigenous Women, Girls and Gender Diverse People. It is an immense honour and privilege for me to have the opportunity to speak with you today. I greatly admire the National Aboriginal Capital Corporations Association and your dedication to supporting Indigenous prosperity and improving living standards for First Nations, Métis and Inuit across Canada. The successful expansion of your lending to the Indigenous economy is a source of inspiration to many, me included. In fact, over the past three decades, you have issued 46,000 loans worth a total of $2.8 billion.1 These numbers are impressive, and these loans have made a huge contribution to the prosperity of the Indigenous economy. But we all know much more needs to be done. The Bank of Canada is committed to supporting you in these efforts. Fostering Indigenous inclusion falls squarely within the Bank’s mandate to promote the economic and financial well-being of our country and all the peoples within it. Taking concrete steps toward economic reconciliation is therefore our responsibility too. As a national public institution, we must show leadership. 1 NACCA, Annual Report 2018–19/2019–20: Toward Indigenous Prosperity (2021). That is what I’d like to talk about this morning. Over the next two years, the Bank will reach out and listen to a wide range of Indigenous groups to define what economic reconciliation means for us and for our work. We will look to our existing partners—and, hopefully, many new ones— to guide us toward a common understanding of what our role should be. By embracing this process—and taking the time to do it right—we hope that the Bank can take a meaningful step toward building trust and strengthening our relationship with Indigenous peoples. In recent years, my colleagues and I listened to our Indigenous partners. We have learned a great deal about the history of the Indigenous economy, its potential and the challenges and opportunities it currently faces. We have also begun to support the Indigenous economy through various means, but we need to become more deliberate in our approach. If we are going to advance economic reconciliation with Indigenous peoples, we need a plan that will focus our efforts and guide our actions. To help restore the prosperity of the Indigenous economy, we want to become trusted partners. And we need to work together to overcome the long-standing obstacles faced by Indigenous peoples and the discriminatory practices that contributed to them. The potential prosperity of the Indigenous economy Before contact with colonizers, Indigenous peoples had thriving economies, communities and governance structures. Manny Jules is chief commissioner of the First Nations Tax Commission and a driving force behind many of the financial innovations I’ll be talking about today. At the Symposium on Indigenous Economies that we hosted last November, he described the state of the Indigenous economy before settlement. He said, and I quote: We paid taxes, had property rights, built, and sustained public and economic infrastructure, had money, and created standards that supported vast and successful trading networks. We used our jurisdiction to create a public and community sector that supported many innovations in agriculture, land and resource management, products, transportation, science, math, and of course Art.2 Tulo Centre of Indigenous Economics, “2021 Symposium on Indigenous Economies” (November 29, 2021). The forces of colonization and assimilation brutally suppressed this vitality, but the Indigenous spirit proves resilient. We all share the responsibility to help restore this prosperity by advancing the objectives of economic reconciliation as recommended by the Truth and Reconciliation Commission.3 Indigenous peoples deserve equitable access to education, employment and economic opportunity. The resulting benefits would be substantial for Indigenous communities because their standards of living would dramatically improve. All of Canada would also gain from an Indigenous economy that is more empowered to realize its full potential. Several recent trends speak to the enormous potential of the Indigenous economy. For example, the Indigenous population in Canada is young and growing fast. Statistics Canada projects that the Indigenous population will grow by more than 50% by 2041, which is almost double the rate of the non-Indigenous population.4 The Indigenous population in Canada is also currently much younger—with just less than half being under the age of 25 compared with less than one-third of the non-Indigenous population.5 Truth and Reconciliation Commission of Canada, “Call to Action #92,” Truth and Reconciliation Commission of Canada: Calls to Action (2015). 4 Statistics Canada, “Projections of the Indigenous Populations and Households in Canada, 2016 to 2041,” (October 2021). Statistics Canada, “Aboriginal Peoples Highlight Tables, 2016 Census.” Statistics Canada Catalogue no. 98-402-X2016009, 2017. Chart 1: Economic indicators are improving faster for Indigenous populations in Canada Total growth from 2017 to 2021, annual data % Employment Education† Earnings* Indigenous Non-Indigenous Note: Indigenous excludes Indigenous people living on reserve and other Indigenous settlements as well as those living in the territories. * Growth of average weekly earnings † Growth in the share of population aged 25–64 with university education Sources: Statistics Canada and Bank of Canada calculations Last observation: 2021 On the jobs front, the number of employed Indigenous people grew by almost 45% in the decade between 2006 and 2016. Recent estimates show this trend continuing, with employment among off-reserve Indigenous people growing five times faster than non-Indigenous employment.6, 7 (Chart 1) In terms of income, the 2016 census found that the median earnings of Indigenous people was 78% of that of the non-Indigenous population.8 Recent estimates9 indicate that weekly wages for Indigenous people living off reserve grew at a higher rate than those for the non-Indigenous population (Chart 1).10 Education, capacity building and the economic opportunities generated by the creation and growth of Indigenous firms are critical to closing this income gap. Clearly, progress toward reconciliation will accelerate these trends. 6 Statistics Canada, “Labour Force Characteristics by Region and Detailed Indigenous Group,” Statistics Canada table no. 14-10-0365-01 (January 2022). 7 These numbers exclude Indigenous populations in the territories. 8 This is up from 70% in 2006. 9 Between 2017 and 2021. 10 Statistics Canada, “Average Hourly and Weekly Wages and Average Usual Weekly Hours by Indigenous Group,” Statistics Canada table no. 14-10-0370-01 (January 2022). Recent developments in education levels are also promising. The percentage of First Nations, Métis and Inuit with a secondary school education or higher grew at a faster rate than that of non-Indigenous people.11, 12 This trend continued over the last few years13 as the percentage of Indigenous people living off reserve with a university degree increased at twice the rate of that of the non-Indigenous population (Chart 1).14 A recent study found that these outcomes could be improved by providing better employment opportunities and a culturally sensitive learning environment and curriculum.15 In terms of business growth, the Canadian Council for Aboriginal Business reports that the number of Indigenous entrepreneurs in Canada continues to rise. In fact, the increase in self-employment among Indigenous peoples has more than doubled that of the non-Indigenous population in recent years.16, 17 Furthermore, Indigenous businesses are performing well. Recent evidence indicates that small and medium-sized enterprises (SMEs) in Indigenous communities export their products and services at rates that are comparable to— or even higher than—non-Indigenous SMEs.18 Export participation is typically associated with businesses that enhance productivity through innovation.19 In addition, many Indigenous firms are involved in environmentally sustainable activities. I don’t mean to gloss over the many challenges that continue to hinder Indigenous prosperity. I simply want to stress that tremendous untapped potential 11 Between 2006 and 2016. 12 Statistics Canada, “Aboriginal Population Profile, 2016 Census,” Statistics Canada Catalogue no. 98-510-X2016001, 2019. 13 Between 2017 and 2021. 14 Statistics Canada, “Educational Attainment in the Population Aged 25 to 64, Off- Reserve Aboriginal, Non-Aboriginal and Total Population,” Statistics Canada table no. 37-10-0117-01 (March 2022). 15 D. Lamb, “Aboriginal Early School Leavers On- and Off-Reserve: An Empirical Analysis,” Canadian Public Policy 40, no. 2 (2014): 156–165. 16 More than 62,000 Indigenous people reported that they were self-employed in 2016, an increase of 44% since 2011. Canadian Council for Aboriginal Business, Understanding Intellectual Property Awareness & Use by Indigenous Businesses: 2019 Intellectual Property Survey of Indigenous Businesses (Summer 2021). 18 A. Bélanger Baur, “Indigenous-Owned Exporting Small and Medium Enterprises in Canada,” Global Affairs Canada & Canadian Council for Aboriginal Business (2019). 19 Canadian Council for Aboriginal Business, Promise and Prosperity: The 2016 Aboriginal Business Survey (2016). exists. This potential will only be realized when private firms and public agencies commit to economic reconciliation. The possible returns should be substantial, both for Indigenous communities and for the entire country. Access to credit and capital—an important barrier The challenges Indigenous peoples face when it comes to restoring their prosperity are the direct result of colonial policies that violated their basic human rights and undermined their political and economic sovereignty. These policies have led to geographic and economic isolation, financial dependence and widespread poverty and suffering. I know you are keenly aware of the obstacles that limit Indigenous economic inclusion, but more Canadians should understand them. Indigenous peoples face numerous barriers to accessing financial services— most notably, credit and capital—compared with the non-Indigenous population in Canada. For example, by restricting property rights, section 89 of the Indian Act established legal barriers to accessing credit. Limiting access to credit has stunted the creation of new businesses and employment opportunities in First Nations communities. Bank of Canada research has found that remoteness and deficient infrastructure have contributed to limited access to cash, banks and financial services more broadly.20 These barriers to financial inclusion—and many others—have increased the cost of living and led to a debilitating underinvestment in Indigenous communities. Research at NACCA has shown that a lack of access to debt and equity finance creates significant challenges for Indigenous entrepreneurs trying to start and grow their businesses. Consequently, these entrepreneurs tend to rely on personal savings to finance their business ventures. Of all the capital financing provided in Canada in 2013, First Nations and Inuit businesses accessed only 0.2%.21 Fortunately, Indigenous institutions have been established to reduce these barriers to financial inclusion. See H. Chen, W. Engert, K. Huynh and D. O’Habib, “An Exploration of First Nations Reserves and Access to Cash,” Bank of Canada Staff Discussion Paper No. 2021-8 (May 2021) and H. Chen, W. Engert, K. Huynh and D. O’Habib, “Identifying Financially Remote First Nations Reserves,” Bank of Canada Staff Discussion Paper 2022-11 (May 2022). 21 National Indigenous Economic Development Board, Recommendations Report on improving Access to Capital for Indigenous Peoples in Canada (September 2017). In particular, the First Nations Fiscal Management Act (FNFMA) was passed in 2005. The resulting financial framework was designed by First Nations to enhance the local revenue-raising powers of their communities and improve access to capital markets to help finance sorely needed infrastructure. The FNFMA framework comprises three institutions that collaborate to enhance the capacity of First Nations to access low-cost financing and develop a stronger climate for investment. The First Nations Tax Commission helps First Nations governments increase their flow of revenue. The First Nations Financial Management Board, meanwhile, helps First Nations adopt sound financial management practices and produce reliable financial information that can be used to assess their capacity to borrow and service debt. Finally, the third institution, the First Nations Finance Authority (FNFA), combines the first two elements to help secure low-cost financing by collateralizing community revenue streams and issuing highly rated debentures to the market. This arrangement represents a First Nations-led framework to get around many of the systemic barriers that continue to impede access to credit, investment and development in First Nations communities. Chart 2: Recent FNFA bond spreads are comparable with similar Canadian municipal bonds Spread over sovereign benchmark Basis points FNFA rolling spreads Note: FNFA is the First Nations Finance Authority. Source: Bloomberg Bloomberg Canadian municipal bond aggregate spread Last observation: March 30, 2022 In fact, the FNFA’s impressive track record has enabled First Nations governments to borrow at rates that are comparable to Canadian municipalities, as we can see in Chart 2. Consequently, over 300 First Nations (about half) have opted to join this innovative and effective framework. Nonetheless, despite issuances from the FNFA totalling $1.63 billion,22 access to finance continues to be a significant issue in Indigenous communities. Huge investment gaps remain. A recent report estimated that First Nations communities face a $30 billion infrastructure deficit, including housing, roads, water treatment, internet access, health centres and schools.23 The newly formed Mi’kmaq Coalition—a grouping of seven Mi’kmaq communities in the Atlantic provinces—boasts one of the most compelling success stories to emerge from this unique financial framework. Its acquisition of 50% of Clearwater Seafoods represents the single largest Indigenous investment in the seafood industry. While this framework has helped First Nations communities obtain better access to capital, it is important to note that individual Indigenous firms—including First Nations, Inuit and Métis—have not similarly benefitted. This is where NACCA comes in. The Aboriginal Financial Institutions (AFIs) that are part of the NACCA network have made greats strides in removing many of the historical obstacles to financing. They provide direct access to finance for many small and mediumsized Indigenous businesses. Since the first AFIs were founded some 40 years ago, the network that NACCA represents has been remarkably successful. 22 This amount has been raised from nine debenture issuances since June 2014. External ratings started at A3 (Moody’s) in 2014 and have improved over time to Aa3 (Moody’s) and A+ (S&P) for the most recent issuance in February 2022. 23 Canadian Council for Public-Private Partnerships, P3’s: Bridging the First Nations Infrastructure Gap (2016). Chart 3: NACCA has increased it's lending while keeping loan loss rates very low Can$ millions % NACCA new loan volume (left scale) Write offs, as percent of total loan portfolio (right scale) Note: NACCA is the National Aboriginal Capital Corporations Association Source: National Aboriginal Capital Corporations Assocation Last observation: 2021 By building trust and capacity across communities, the network has more than doubled new annual loan volumes since 2005 while keeping loss rates very low (Chart 3). It seems clear that the success of NACCA and the AFI network stems directly from how well these financial institutions know their clients. Working closely to support their borrowers has helped them build strong relationships and a solid understanding of their needs and financial capacity. I am highly optimistic that the new Indigenous Growth Fund will also perform well under NACCA’s leadership. Incomplete transmission of monetary policy Despite these successes, more needs to be done to ensure that Indigenous governments, households and businesses have comparable access to financial services. This is important because these barriers to financial markets have other negative effects. For example, they hinder the transmission of monetary policy to the Indigenous economy. - 10 - Chart 4: Policy interest rate reductions are not being fully transmitted to Indigenous borrowers Percentage point change Percentage points -1 -2 -3 -4 -5 2000-2002 2007-2009 Bank of Canada policy interest rate 2014-2016 Prime rate 2019-2021 Aboriginal financial institutions* Note: Changes are calculated from annual averages of fiscal years ending March 31. * Interest earned (as a percentage of business loans outstanding) Sources: National Aboriginal Capital Corporations Assocation and Bank of Canada calculations Last observation: 2021 To illustrate this issue, let’s consider four times since 2000 when the Bank cut interest rates to encourage borrowing and stimulate demand (Chart 4). The chart shows that for, most of these periods, interest rates paid by Indigenous businesses on their loans from AFIs did not fall as much as either the Bank of Canada’s policy interest rate or the prime rate charged by banks to their preferred customers. This suggests that monetary policy has been less effective at stimulating the Indigenous economy than other parts of the Canadian economy. It is worth noting that during the most recent period of monetary policy easing in 2020–21, the relatively large decline in interest earned by AFIs reflected the impact of government policies. These policies enabled AFIs to reduce interest payments during the pandemic. The main reason for this incomplete transmission of monetary policy to the Indigenous economy is the lack of access to financial services, primarily limited access to market-determined borrowing rates. Other barriers to Indigenous economic opportunity Of course, beyond these issues of access to finance, other barriers to Indigenous economic opportunity exist. For example, limited opportunities for education and skill development adversely affect employment and income outcomes, access to credit, firm creation and economic development. Of particular concern is the fact that fewer Indigenous students are in the fields of science, technology, engineering and mathematics, - 11 - at only 40% of the average Canadian rate.24 The Bank of Canada is trying to address these barriers by sponsoring Indigenous scholarships and internships. We also recognize that we must do better at hiring Indigenous staff and we are committed to doing so. Meanwhile, attempts to measure the size and performance of the Indigenous economy in Canada are constrained by the availability and quality of data. This represents another important barrier to economic inclusion because inadequate information impairs financial management and decision making. For example, economic data are often unavailable at the community level and are not comparable across communities or with non-Indigenous communities. But efforts are being made to fill these information gaps. For example, the Bank has partnered with the Canadian Council for Aboriginal Business, Global Affairs Canada and Big River Analytics to conduct a large-scale survey of Indigenous businesses in 2021. This survey should help us better understand the composition of the Indigenous business sector and market conditions faced by Indigenous firms, both on and off reserve. A collaborative partnership has also been established between the three FNFMA institutions, Statistics Canada, the Bank of Canada and the Tulo Centre. This collaboration seeks to empower Indigenous communities with improved financial statistics to enable effective decision making. The intention is to expand the scope of this work to include Inuit and Métis communities.25 Our journey toward an action plan for economic reconciliation While progress is being made on several fronts, many obstacles continue to limit the potential of the Indigenous economy. I’m pleased to be among friends to announce the beginning of our journey—one that will take aim at these obstacles and help define what economic reconciliation means to the Bank, to Indigenous peoples and to the broader Canadian economy. Statistics Canada, “Census of Population,” Statistics Canada Catalogue no.98-400X2016263, 2016. 25 The Bank is also working with Statistics Canada and the Tulo Centre of Indigenous Economics on a pilot project to develop a First Nations consumer price index. Such a price index would measure changes to the cost of living in First Nation communities more accurately, which would lead to better decisions when setting tax rates or funding levels. - 12 - We’ll start by talking to the people who know us best—the organizations we’ve already been working with. These include NACCA, the Tulo Centre and the Bank’s Indigenous Advisory Circle. We will use these conversations with our friends not only to seek guidance about the main question of economic reconciliation, but also to invite them to suggest other Indigenous organizations and communities who may be interested in sharing their views. We hope to expand our circle of Indigenous partners. As these conversations evolve over time, the Bank will reflect on what we are hearing. We will then work with our partners to prioritize actions and develop a formal reconciliation action plan that will help us build on what we are currently doing. It is important that we take the time necessary to craft the right plan, with an aim to publishing it sometime in 2023. We recognize that this plan is simply the start of a longer journey toward reconciliation with Indigenous peoples. It will need to be updated over time. Last November, many of us in this room participated in the Symposium on Indigenous Economies that I mentioned earlier. Personally, I was quite moved by the experience. A heightened spirit of cooperation permeated those sessions. This atmosphere of collegiality, derived directly from the Indigenous perspective of commitment to the common good, was critical to the success of the Symposium and it offered an important lesson for our work going forward. Being open to learning from Indigenous experiences and incorporating Indigenous perspectives in many aspects of our work is vital. I hope that this same spirit of openness, trust and collaboration will inspire and drive our engagement over the next two years. Our commitment As many of you may know, I will be retiring from the Bank of Canada in June, but I will not be retiring from my own personal efforts to support Indigenous economic inclusion and opportunity. I have been inspired and impressed by your wisdom and commitment. I have found my engagement with you on these important issues deeply enriching. I will forever be grateful for the guidance and support that you have kindly provided during my time at the Bank. As we take this next crucial step in our journey toward reconciliation, we welcome your views on the actions we can take to contribute to the economic and financial well-being of Indigenous communities. I also invite you to hold us accountable for the commitments we are making. - 13 - By working together, I am convinced that we can, over time, make a significant and positive contribution to reconciliation and improve the welfare of Indigenous communities in this country. Thank you for your attention today and for your warm and generous friendship. Meegwetch, merci, thank you.
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Remarks by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, at the Association des économistes québécois, Montreal, Quebec, 12 May 2022.
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Toni Gravelle: The perfect storm Remarks by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, at theAssociation des économistes québécois, Montréal, Quebec, 12 May 2022. * * * Accompanying slides can be found on the Bank of Canada’s website. Introduction Good morning. It is a pleasure to be here—and a particular pleasure to be giving my very first inperson speech since I joined the Bank of Canada’s Governing Council. It’s so nice to see people without the fancy or blurred backgrounds we see in our virtual world. Kidding aside, it is wonderful to be here among friendly faces and fellow economists. I’d like to apologize in advance, as I can’t stay long after my speech. So let me jump into what I want to talk about today—the commodity price shock that has come with the pandemic and the war in Ukraine, and what it means for Canada. Commodity prices have had a pretty wild ride for the more than two years of the COVID-19 pandemic. Now, with the horrific war in Ukraine and the disruption it brings to the supply of many commodities, prices have shot up even more. I want to explain how this particular commodity price shock has a different impact on Canada’s economic growth than those that have come before. In my remarks today, I also want to talk about how the current inflation environment has a few parallels with that seen in the 1970s—but also some important differences. I will also go over the “perfect storm” of events driving inflation higher than we had previously projected. Finally, I want to talk about what our policy response might look like going forward. Two years of rocketing commodity prices Since the summer of 2020, nominal commodity prices have doubled according to the Bank of Canada commodity price index. And the oil price component is up 150%. Two factors are at work here: the economic upheaval brought about by the pandemic and, more recently, the war in Ukraine. Let me break that down a bit. The pandemic altered the economic landscape globally. Commodity prices dropped initially—we all remember 70- or 80-cent gasoline prices during the first lockdown. But oil and many other commodity prices have climbed since spring 2020 (Chart 1). Some of this climb was due to supply factors. We’ve had drought and other severe weather events, production slowdowns caused by the pandemic and transportation bottlenecks. But the rapid bounce back in demand also played a big role in price increases. For example, global oil demand rebounded by 5.6 million barrels per day in 2021, while supply rose by only 1.4 million barrels per day. That led to a decline in global oil inventories and upward pressure on prices. The disruption of global oil supply due to the war in Ukraine has only put more upward pressure on the price of oil and many other commodities. What does this all mean for Canada? First, for every Canadian, higher prices for oil, wheat, fertilizer and other commodities are boosting the prices of everyday items like gasoline and groceries. Second, higher prices for the commodities Canada exports improve our terms of trade—the price of exports relative to the price of imports. These in turn typically increase production, exports and investment in commodity-related sectors, spurring employment and generating higher profits for businesses, incomes for workers and revenues for governments. These higher profits, incomes and 1/5 BIS central bankers' speeches revenues flow back into the economy in the form of higher spending on goods and services. The response of the Canadian economy to higher commodity prices this time looks to be more moderate than usual. Canada could once count on strong investment in our energy sector when prices were high—for example, from the late 1990s to around 2007. But investors expect demand for fossil fuels to moderate over the medium to long run. These expectations are now weighing on investment in this sector. In fact, the oil and gas sector has been a drag on overall investment growth since 2015 (Chart 2). As a result, we expect the recent increase in commodity prices to boost the level of business investment in Canada by less than half of what our models generally predict based on historical relationships. All in all, the commodity price shock is expected to generate a modest positive impact on the growth outlook for Canada—smaller than we have seen in the past. There is another difference this time around—the impact on currency. The Canadian dollar would typically appreciate alongside the rising trajectory of our commodity prices, but we’re not seeing much of that now (Chart 3). Part of that is likely due to the investment climate I’ve just outlined. Foreign investment flows into Canada’s energy patch are not as large as in the past. This lower investment reduces the amount our exports can increase in volume terms going forward. So it’s not too surprising that other factors have dominated movements in the currency, leading some to say the Canadian dollar no longer follows commodity prices. The main factor has likely been the strength in the US dollar, which has benefitted from safe-haven flows as the Ukraine war broke out as well as a sharp rise in US yields, relative to other jurisdictions, over the last few months or so. This brings me back to inflation. It’s clear that, due to the war, global and Canadian inflation is going to be higher than we expected. Supply of commodities has been disrupted while global demand for commodities remains largely intact. And because the currency is not appreciating with this positive commodity price shock as much as it normally would, the prices of imported goods are not declining. Such a decline would have helped lower the price of some of the items we buy regularly. Instead, overall, consumer price index (CPI) inflation hit 6.7% in March, its highest level in more than three decades (Chart 4). Inflation yes, but not stagflation Inflation at 30-year highs naturally leads to comparisons with the stagflation period of the 1970s. Those comparisons aren’t justified. Yes, we’ve got inflation at multi-year highs, partly in response to supply-driven oil (and other commodity) price shocks like in the 1970s. But inflation is quite a bit lower than in the 1970s. Moreover, stagflation is defined as periods of high inflation that occur at the same time as high levels of unemployment and very slow or recessionary growth. Given where we are now, we don’t see the stagnant part of stagflation—quite the opposite. The Canadian economy, across many measures, is running pretty hot. In the second half of 2021, quarter-over-quarter growth in gross domestic product averaged 6% on an annualized basis. And we expect growth around 5% in the first half of 2022. The last time we saw that rate of growth was a 12-month stretch that ended in mid-2000—22 years ago, the last time we raised our policy rate by 50 basis points. Another important difference between now and the 1970s is the state of the labour market. Unemployment averaged about 8% from about 1976 to 1982, the height of stagflation. How is it today? Well, the labour market is very tight—much stronger than it was then. The unemployment rate is at a record low of 5.2% (Chart 5). Total employment and hours worked are well above pre-pandemic levels (Chart 6). Our most recent Business Outlook Survey showed that labour 2/5 BIS central bankers' speeches shortages are widespread and that many firms are struggling to fill vacancies. This is particularly the case in Quebec. In general, job creation has been strong since the autumn, and the unemployment rate is now at a historical low of 3.9% in the province. Some of you will say that is all well and good, but couldn’t we see stagflation appear in the coming year or so? Isn’t growth going to slow as the Bank of Canada raises policy rates? Yes, growth will slow—the goal of higher rates is to reduce excess demand and bring it more in balance with supply. That should reduce inflation, undercutting the inflation part of stagflation. For example, there is a lot of excess demand for interest-sensitive goods and for housing, some of the key contributors to inflation pressures. Supply and demand should come more into balance in these segments as policy rates rise, reducing inflationary pressures. More importantly, a slowdown in growth does not have to mean high unemployment, which was the hallmark of the stagflation period of the 1970s. Right now, job vacancies are very high, which means employers are trying to hire still more workers from a declining pool of labour. By cooling overall demand, we can reduce the demand for labour and the degree of labour shortages in the economy. Employers could stop looking for new workers but keep the ones they have—with little impact on the unemployment rate. That is a scenario that delivers a soft landing. While we’re thinking about the job market, there is another important point. Wage-setting dynamics are different now than in the 1970s. Fifty years ago, persistently high inflation played a more central role in the wage bargaining process. This is highlighted by the fact that the average contract length for collective agreements in Canada has more than doubled from roughly 18 to 20 months in the early 1980s to 42 months by 2021.1 This implies that unionized workers see less need now than they did in the 1970s or early 1980s to have their wage contracts frequently updated to catch up to rising consumer prices. The final, and more fundamental, difference between now and the period of high inflation in the 1970s is the inflation-targeting regime adopted by the Bank of Canada in 1991. From this first agreement with the Government of Canada, and at every renewal, the Bank’s intent has been to target low and stable inflation to ensure that Canadians can make their economic decisions without worrying that inflation would erode the value of their money. 2And it has worked. This monetary policy framework has kept both inflation and expectations of future inflation low. Longterm inflation expectations in Canada declined from 4% in 1990 to stabilize at 2% around 1995.3 Although we don’t have measures of Canadian inflation expectations in the 1970–80s, it is likely that they were as high in the 1970s as they were in the United States. There, inflation expectations averaged around 7% over the mid-1970s to mid-1980s (based on the University of Michigan Surveys of Consumers). Inflation targeting has allowed households and businesses to spend less time and energy on trying to compensate—or find workarounds—for rising consumer and input prices. Or put another way, it has allowed workers to bargain for and—expect—wage gains that recognize their skills and experience, not the need to compensate for the erosion of purchasing power. A perfect storm of higher prices This brings me to the humbling topic of where inflation is today, and why we have been surprised by its strength and persistence. Inflation pressures have been higher and more tenacious than we expected, largely because the economic conditions of the pandemic were unprecedented. Chart 7 says it all. Back in January 2021, we projected an uptick in inflation—but we expected it would be transitory, falling back as supply chain disruptions eased quickly. But as you can see, we have revised inflation projections higher in each Monetary Policy Report (MPR) since. This is largely due to repeated updates to our view of the strength and persistence of supply chain disruptions. 3/5 BIS central bankers' speeches In fact, we can now say that we have faced a “perfect storm” when it comes to global and domestic inflation. First, the recovery took on a unique characteristic. Goods consumption and housing activity quickly rose above pre-pandemic levels. That is, the pandemic generated a sharp shift toward goods consumption (Chart 8). This in turn strained and disrupted already weakened global supply chains, which I spoke about in my last speech. This sharp rebound in global demand for goods, along with pandemic-related restrictions and some weather-related events, created the perfect storm. The global supply of goods did not meet rapid growth in demand, causing goods prices to rise in Canada and around the world. Second, as I discussed, global commodity prices rose faster than anyone expected, partly in response to the strong economic recovery and more recently the war in Ukraine. We had expected some persistence of these supply problems. But modelling and predicting the resolution of supply issues is extremely difficult, and these supply problems have turned out to be more persistent. All these unique, largely global, factors led to higher inflation than we expected. In April we once again revised our inflation projection higher. We incorporated into our base-case scenario part of the upside risk to inflation related to more persistent supply chain issues that we outlined in our January MPR. We said in April that we expect inflation to average almost 6% in the first half of 2022 before easing to about 2½% in the second half of 2023 and returning to the 2% target in 2024. And the March CPI number was above what we were projecting and will likely lead us to further revise our near-term profile for inflation. The policy rate is going up That brings me to my final point today—the path of our policy rate. We are confronted with an economy that is showing clear signs of overheating, very tight labour markets and this perfect inflationary storm of global events and preference shifts. Economic growth is displaying stronger momentum than we expected over the past few quarters. We’ve revised up expected growth in the first half of 2022 compared with what we had in January MPR. All of this means that our policy rate, at 1%, is too stimulative, especially when inflation is running significantly above the top of our control range. We need our policy rate to be at more neutral levels to help cool demand growth and bring the economy into balance. That’s why we are taking actions to normalize our policy rate quickly and are prepared to be as forceful as needed. Simply put, with demand running ahead of the economy’s capacity, we need higher interest rates to cool domestic inflation. And as we’ve said before, the economy can handle it. But here’s where I want to discuss some of the nuances of the future path of interest rates. Economists are notorious for saying “on the one hand this, but on the other hand that.” And I’m about to live up to the stereotype. As we said in April, we could pause our interest rate increases when we get close to the neutral rate, which is a level of rates that neither stimulates nor weighs on the economy. Or we could raise interest rates beyond neutral levels. Let me elaborate on those two scenarios. First, what might lead us to pause our policy rate increases as the rate enters our estimated range for neutral of 2% to 3%? One reason would be if price increases reversed course. Commodity prices could start to decline, especially if the war in Ukraine is resolved. Another reason is related to the bullwhip effect. Spending habits shifted dramatically into goods and out of services at the outset of the pandemic. But now the economy is almost fully open. Because of this, spending on goods could decline faster than we expect, just as goods supply and inventories finally expand. Faced with excess supply, retailers and manufacturers could put large discounts on goods. This too could reverse observed price increases. Another factor that might lead us to pause is that many households have taken on more debt to get into the housing market. At the end of 2021, the household debt-to-income ratio was 186%, above the pre-pandemic level of 181%. And rising interest rates are designed to slow the 4/5 BIS central bankers' speeches economy by making borrowing more expensive. That tends to slow sectors like housing. But this slowing might be amplified this time around because highly indebted households will face high debt-servicing costs and will likely reduce household spending more than they would have otherwise. Our base-case scenario includes a slowdown in housing activity. But we could see a larger-than-expected slowdown due to higher indebtedness and unsustainably high housing prices. Now let me explore what would cause us to raise the policy rate modestly above neutral levels. Global supply chain issues could be more persistent. In addition, we could get a stronger boost in consumer spending as COVID-19 restrictions ease and people spend more of the savings they accumulated during the pandemic than we currently expect. We may also need to raise rates above neutral because parts of the economy may be less sensitive to rate hikes than in the past. That’s because, on average, Canadians are in better shape financially than they were before the pandemic. For example, the average household has accumulated $12,000 in liquid assets, and Canadians have reduced non-mortgage debt balances.4 In addition, housing activity might be supported by factors that are not directly related to interest rate movements. Specifically, we could also get stronger demographic demand from immigration. Or some of the increase in housing demand we saw during the pandemic—for bigger housing and in suburban locations—could persist much more than we have factored into our projection. All this might lead to stronger underlying demand growth than in our current projection, despite higher interest rates. These considerations should make it clear that we are not on a pre-set path of policy rate increases aimed at getting to a specific “terminal” rate. Our decisions are not on autopilot. Conclusion It’s time to wrap up. We’re living in extraordinary times. The doubling of commodity prices since the summer of 2020 and the reshaping of supply chains, as a result of both a pandemic and a European war, has caused enormous economic upheaval. Rising inflation is causing pain to consumers in many countries. All Canadians feel the cost of this high inflation. Inflation at 5% for a year—or 3 percentage points above our target—costs the average Canadian an additional $2,000 a year. And it is affecting more vulnerable members of society the most because prices of essential items like food and gasoline have risen sharply. This broadening of price pressures is a big concern. But this is not the 1970s all over again. Growth is strong in Canada, and the labour market is very tight. We have low unemployment, strong growth and, unfortunately, strong inflation. And importantly, our policy landscape is different as well. Since the 1990s, we and other central banks around the world have had success with inflation targeting. In Canada, inflation has been close to 2% and relatively steady for nearly 30 years. And we are committed to bringing inflation back to target, using higher interest rates and communicating clearly along the way. Thank you for listening. I’d be happy to take your questions. 1 1. Source: Employment and Social Development Canada. 2 2. Bank of Canada, “Targets for reducing inflation,” Bank of Canada Review (March 1991). 3 3. Consensus Economics, 6-to-10-year-ahead inflation expectations. 4 4. See S. Kozicki, “A world of difference: Households, the pandemic and monetary policy,” (speech delivered virtually to the Federal Reserve Board of San Francisco Macroeconomics and Monetary Policy Conference, San Francisco, California, March 25, 2020). 5/5 BIS central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the release of the Financial System Review, Ottawa, Ontario, 9 June 2022.
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Opening Statement by Tiff Macklem and Carolyn Rogers Governor and Senior Deputy Governor of the Bank of Canada Press conference following the release of the Financial System Review June 9, 2022 Ottawa, Ontario Good morning. I’m pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss the Bank of Canada’s Financial System Review (FSR). The FSR is our annual assessment of the key vulnerabilities of and risks to the Canadian financial system. Our goal in identifying these is to help households, the private sector, financial authorities and governments take actions to reduce them. We have just come through the biggest shock I hope any of us ever have to face—two years of a pandemic and unprecedented economic and social upheaval. We are pleased to report that our financial system is strong and weathered the crisis well. Now, the global economy is dealing with a new set of challenges: high inflation, rising interest rates, Russia’s unprovoked invasion of Ukraine and financial market volatility. So this is a good time to discuss existing and emerging vulnerabilities and risks. In nearly every FSR, we warn about the high debt that many Canadian households are carrying, and we warn about elevated house prices. Those are not new vulnerabilities, but the pandemic has affected them. Over the course of the pandemic, household balance sheets shifted as both spending and incomes adjusted. On average, household wealth increased as a result of rising asset values, including real estate, and markedly higher savings. This improvement, and the rise in savings in particular, is remarkable considering the devastating and lasting impacts the pandemic could have had. But to assess vulnerabilities we need to look beyond the average and examine the distribution of changes across households. What we see is that, even as the average household is in better financial shape, more Canadians have stretched to buy a house during the pandemic. And these households are more exposed to higher interest rates and the potential for housing prices to decline. Two-thirds of Canadians are homeowners. Just under half own their home outright, and the rest have a mortgage. Of those, 70% have a fixed-rate mortgage that is not immediately affected by higher interest rates. The other 30%—or 10% of Canadian households—have a variable-rate mortgage. Throughout the pandemic, a growing number of Canadians took out mortgages that were very large relative to their incomes, at variable rates with amortization periods of more than 25 years. And our models suggest that the most highly indebted households saw only a small increase in their liquid assets in that time. This brings me to our second, and related, vulnerability—elevated house prices. Strong demand for more living space, low interest rates, inadequate supply, increased investor activity and expectations of future price increases all made for a hot market during the pandemic. House prices rose about 50%, on average, since the beginning of the pandemic. As Canadians return to more normal activities and interest rates rise, we expect to see some moderation in the housing market. Indeed, this has started. Recent data indicate a marked decline in the level of resale activity from its peak. And even if house prices are up sharply on a year-over-year basis, some markets have recently seen declines. With inflation well above the 2% target and the Canadian economy overheating, the Bank’s number one priority is to get inflation back to target, and we are raising interest rates to make that happen. Labour markets are very strong, and household balance sheets have improved overall. The economy can handle— indeed needs—higher interest rates. And given the unsustainable strength of housing activity, moderation in housing would be healthy. But high household debt and elevated house prices are vulnerabilities. If the economy slowed sharply and unemployment rose considerably, the combination of more highly indebted Canadians and high house prices could amplify the downturn. If those in highly indebted households lose their jobs, they would likely need to reduce their spending sharply to continue servicing their mortgage. In addition, a big correction in house prices would reduce both household wealth and access to credit, particularly among the most-indebted households. Were this to affect many households, it could have broad implications for the economy and financial system. This is not what we expect to happen. Our goal is for a soft economic landing with inflation coming back to the 2% target. But it is a vulnerability to watch closely and manage carefully. Let me now turn to Carolyn to address three global vulnerabilities outlined in the FSR. Thank you, Governor. The final set of vulnerabilities described in our FSR has been highlighted by the war in Ukraine and other geopolitical tensions, and some risks are rising. Events over the past year have emphasized the interconnected nature of the global financial system. Russia’s invasion of Ukraine has increased our concern about cyber security. Globally, state-sponsored cyber attacks have increased in frequency and sophistication since the war in Ukraine began. That increases the risk of attack on a Canadian bank, other financial institution or our financial market infrastructures. Given the interconnected nature of financial markets, the impact of a successful cyber attack on one institution could spread to the broader financial system. The war has also further added to the level of uncertainty around the transition to a low-carbon economy. In the short term, it threatens global energy security, increasing the dependence on higher emitting fossil fuels like coal, and risks slowing the transition. Over the medium term, transition uncertainty means that assets exposed to the fossil-fuel sector, including those found in the pensions and retirement savings of many Canadians, are at risk of large and rapid repricing. We need better transparency about climate exposures by businesses and financial institutions. We also need clear transition plans by global policymakers. Together these can help mitigate the risk of a disorderly and painful transition that hurts both our financial system and our economy. Finally, cryptoassets are a growing vulnerability. More Canadians are investing in cryptocurrencies. But the growth of these markets has outpaced global efforts to regulate them. Like other speculative assets, cryptocurrencies are vulnerable to large and sudden price declines. And recently, some stablecoins—a type of cryptocurrency—have failed to deliver on their promise of stability. While cryptoassets do not yet pose a systemic risk to the Canadian financial system, the lack of regulation means they don’t have the safeguards that exist for more traditional assets. And their risks may not be well-understood by investors. Regulators around the world and in Canada have recognized this risk and are working to address it. Let me conclude by underlining that vulnerabilities are best thought of as weaknesses in the financial system. In normal times they may not have much impact. But large shocks can cause much more economic and financial damage when vulnerabilities amplify their effects. We have summarized the main vulnerabilities that are highlighted in the FSR. The report also outlines what is being done to mitigate them and to develop contingency plans because even the best planning can’t eliminate risk. It’s a very comprehensive report and offers just a snapshot of the work we do on financial stability all year long. The Governor and I will be happy to take your questions.
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 13 July 2022.
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Opening Statement by Tiff Macklem Governor of the Bank of Canada Press conference following the release of the Monetary Policy Report July 13, 2022 Ottawa, Ontario Good morning. I’m pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today’s policy announcement and the Bank’s Monetary Policy Report (MPR). Today, we raised the policy interest rate by 100 basis points, or 1%. An increase of this magnitude at one meeting is very unusual. It reflects very unusual economic circumstances: inflation is nearly 8%—a level not seen in nearly 40 years. I want to explain to Canadians why we’ve made this decision. There were three key considerations. First, inflation is too high, and more people are getting more worried that high inflation is here to stay. We cannot let that happen. Restoring price stability—low, stable and predictable inflation—is paramount. Second, the Canadian economy is overheated. There are shortages of workers and of many goods and services. Demand needs to slow so supply can catch up and price pressures ease. And third, our goal is to get inflation back to its 2% target with a soft landing for the economy. To accomplish that, we are increasing our policy interest rate quickly to prevent high inflation from becoming entrenched. If it does, it will be more painful for the economy—and for Canadians—to get inflation back down. With these important considerations in mind, the Governing Council decided to front-load the path to higher interest rates today. This is our fourth consecutive interest rate increase since March. We know that higher interest rates will add to the difficulties that Canadians are already facing with high inflation. But the strain of higher interest rates in the short term will bring inflation down for the long term. It will get us to the other side of this difficult period and back to normal. Things are not normal right now. After 30 years of low, stable inflation, many Canadians are experiencing the pain of high inflation—and the uncertainty that comes with it—for the first time. Over half of the components in the consumer price index (CPI) basket are rising above 5%. When inflation is this high, it erodes the purchasing power of every Canadian. The drivers of inflation are the same in Canada as in most countries. The war in Ukraine and continued supply chain disruptions have boosted inflation in Canada and around the world. But what started as global inflation driven by higher global energy and goods prices is broadening here at home. Inflation is broadening because the Canadian economy is in excess demand. There aren’t enough goods and services to meet the demand we’re seeing as people enjoy a fully reopened economy. Employers can’t find enough workers and they’re increasing wages to attract and retain staff. With households spending robustly, businesses are passing on higher input and labour costs by raising prices. Higher interest rates will help slow demand and allow supply time to catch up. Consumer spending will moderate as the pent-up demand from pandemic restrictions eases and the cost of borrowing increases. Housing market activity is already cooling rapidly from unsustainably high levels during the pandemic. And slower global growth will reduce demand for our exports. Taking all of this into account, we are forecasting annual growth in economic activity will be around 3½% this year, 1¾% next year and 2½% in 2024. As global bottlenecks gradually resolve and tighter monetary policy works its way through the economy, inflation will start to come down. While we may see a few more months with CPI inflation around 8%, we expect it to decline later this year, ease to about 3% by the end of next year and return to the 2% target by the end of 2024. This is the soft landing we are projecting. Interest rate increases can cool demand and inflation without choking off growth or causing a surge in unemployment. Some sectors will be more affected by interest rate increases than others, but the very tight labour market means there is room to reduce the number of job vacancies without having a big impact on overall employment. And with the prices of many of the commodities we export expected to remain elevated, the global forces slowing growth will not affect Canada as much as many other countries. But the path to this soft landing has narrowed because elevated inflation is proving more persistent. And this requires stronger action now so consumers and businesses can be confident that inflation will return to its 2% target. Our decision today takes the policy interest rate to 2½%. That puts it in the longrun neutral range that neither stimulates nor restricts growth. We estimate that range to be between 2% and 3%. We continue to expect that interest rates will need to rise further to cool demand and achieve the inflation target. How high our policy rate needs to go will depend on how the economy and inflation evolves. By front-loading interest rate increases now, we are trying to avoid the need for even higher interest rates down the road. Front-loaded tightening cycles tend to be followed by softer landings. This argues for getting our policy rate quickly to the top end or slightly above the neutral range. Before I turn to your questions, let me say a few words about the Governing Council’s policy discussions. We noted that major global events, including the war in Ukraine and severe COVID-19 restrictions in China, have not abated and are putting upward pressure on inflation and dampening global growth. And we recognized that the resolution of global supply disruptions remains difficult to predict. We discussed the momentum in domestic demand and how it is becoming a more prominent driver of inflation in Canada. A wide range of labour market indicators, including the record-low unemployment rate, widespread labour shortages and higher wage growth, all point to an economy that is overheated. We also reviewed measures of inflation expectations at some length. The prevailing view in consumer and business surveys is that the Bank of Canada will ultimately control inflation. At the same time, these surveys clearly suggest inflation expectations have moved up and are becoming more dispersed, with more respondents now seeing high inflation persisting. Market-based measures of inflation expectations over the next two years as well as the projections of professional forecasters have also risen, though they remain consistent with the 2% inflation target over the longer term. While the Governing Council was reassured that the inflation target remains credible overall, we recognized this credibility is being tested. Demand in the economy is running ahead of supply, inflation is high, and uncertainty about future inflation has increased. All of that led us to the decision we took today to accelerate the path to higher interest rates. We did not take this decision lightly. We are acutely aware that higher interest rates will affect Canadians who are already feeling the pain of high inflation. It can seem counterintuitive to add to the interest costs Canadians face in order to combat the cost of inflation. But by increasing the cost of borrowing we will moderate spending and return inflation to target. We need to get price changes back to normal. This matters because it gives people predictability—to plan their spending and savings decisions, to budget, to live their lives without having to worry about what things are going to cost next week, next month or next year. The way to protect people from high inflation is to eliminate it. That’s our job, and we are determined to do it. The Governing Council is resolute in its commitment to price stability. With that, let me stop and turn to you for questions.
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Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, before Calgary Economic Development, Calgary, Alberta, 8 September 2022.
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Remarks by Carolyn Rogers Senior Deputy Governor Calgary Economic Development September 8, 2022 Calgary, Alberta Economic progress report: Restoring price stability Good morning, everyone, and thank you for the opportunity to be here. This is my second public speech since joining the Bank of Canada at the end of last year, and I am really pleased to be out west this time. I grew up in Western Canada and over the course of my career have lived in every province from Manitoba west to British Columbia, including some time here in Calgary. My favourite time to be out west is in the fall, during harvest. It’s a time of year that holds a lot of promise and brings back many fond memories for me. I’m looking forward to spending the next couple of days speaking with business leaders like you, hearing their perspectives on the Albertan and Canadian economies. But first, I’d like to offer you some of the Bank’s views—particularly on the economy and monetary policy. I plan to cover three things this morning. First, I want to spend some time discussing our current view on the Canadian economy and inflation, specifically. The consumer price index (CPI) was 7.6% in July, down slightly from June’s rate of 8.1%. While it looks like we might have seen the peak of overall inflation in Canada, inflation excluding gasoline prices has continued to rise and broaden across goods and services. There are also some significant uncertainties, particularly in global commodity markets, that could set us back. And although most days it feels like the pandemic is behind us, we are heading into winter, and that means more time indoors. If we’ve learned anything over the last two years, it’s to expect the unexpected. Of course, the second thing I want to talk about is our most recent rate decision. Yesterday the Bank raised the policy interest rate by 75 basis points. This came on the heels of July’s decision to increase the policy rate by a full percentage point. In total, the Bank has increased the policy rate by 3% since March. I’ll spend some time explaining why we have chosen to front-load rate increases— I would like to thank Erik Ens and Kristina Hess for their help in preparing this speech. why we think this has been the right response to the current underlying causes of inflation in Canada. The third and final thing I will spend some time on is the path forward. I hope to give you a sense of the things the Bank will be monitoring closely—the signs we will be looking for—to guide our decisions in the months ahead. Monetary policy takes time to affect the economy. The decisions the Bank makes now, and the ones we have made in recent months, will take up to two years to have their full effect on inflation. In the meantime, there are indicators we look at to help guide our decisions, and I will shed some light on those today. I’m going to begin with how our views on the economy have evolved since July because that will help give some context to yesterday’s decision. Economic developments Let me start with inflation. Global supply challenges and elevated commodity prices continue to contribute to inflation here in Canada. In addition, demand continues to outstrip supply in many parts of the Canadian economy, and shortterm inflation expectations remain high. As long as this continues to be the case, there will be upward pressure on prices. Many Canadians experienced this over the summer as they tried to make up for the past two summers of missed vacations and family gatherings. They faced limited options and higher prices when it came time to book campsites, car rentals, hotel rooms, plane tickets and even dinner reservations. This price pressure is not limited to discretionary items like vacations and restaurants. In fact, things like groceries, gasoline and rent have seen some of the biggest price increases. These are all things Canadians need and buy on a regular basis, so it’s impossible to escape the frustration and stress that inflation brings—especially for those living on lower or fixed incomes. High inflation is affecting businesses too. Inputs—things like raw materials, intermediate inputs and labour—are more expensive. While businesses can try to pass on higher input costs by raising prices, inflation creates uncertainty that can affect investment decisions. In the long term, this puts downward pressure on productivity and prevents businesses—and the economy as a whole—from growing. Although CPI inflation came in slightly lower in July, this drop was due mostly to gasoline prices. If we exclude gasoline prices, inflation increased and spread across components. In fact, more than half of CPI components grew more than 5% in July, and the Bank’s measures of core inflation continued to move up. All of them were at or above 5% in July. This shows how strong underlying inflation remains in Canada. With respect to the economy more broadly, it has evolved largely as we expected it would when we published the July Monetary Policy Report. Consumer spending was strong in the second quarter, with a recovery in hard-todistance sectors boosting spending on services in particular. Early indicators— such as restaurant and hotel reservations—suggest that demand for services remains strong in the third quarter. Housing resales have dropped from unsustainably high levels during the pandemic. And house prices have been adjusting downward, with the largest price declines occurring primarily in areas of the country where they increased the most over the last two years. On the business side, a surge of imports of machinery and equipment in the second quarter points to strong business investment in the second half of the year. And the export outlook remains positive too. Alberta’s economy has benefited from this strength, as well as from higher oil prices, both of which should boost investment and exports in energy and other commodities sectors. The labour market remains tight. The unemployment rate is at an all time low, and we’re still seeing significant labour shortages across most sectors. With more than one million current job vacancies in Canada, demand from employers remains high. Softer global demand for goods is contributing to some improvement in supply chain bottlenecks. Global shipping rates have declined considerably in recent months and are now about 50% below their peak in September 2021. And supplier delivery times and backlogs have continued to improve in July across most regions of the world. While the global picture is encouraging, supply constraints remain widespread here at home. Canadian businesses are not yet seeing major relief on the supply front. Taken together, the data over the past two months point in one direction—the Canadian economy continues to operate in excess demand, despite the recent pullback in housing, and inflationary pressures are increasingly broad-based. This leads me to our decision yesterday to raise the policy rate to 3.25%. Our decision yesterday This is the fifth increase to our policy rate since March of this year. The speed and size of these rate hikes have been unusual, and we know some Canadians are anxious to know whether they are working as intended to bring down inflation. We also know that, for many Canadians, higher rates are adding to the burden they are already facing with high inflation. But raising interest rates is necessary to bring inflation down. Higher interest rates make borrowing more expensive and savings more attractive, leading consumers and businesses to spend less and save more. As people spend less, overall demand in the economy declines, and this will give supply a chance to catch up. Because we are in a period of excess demand, we need a period of lower growth to balance things out and bring demand back in line with supply. The reduced spending that results from this rebalancing will ultimately lead to lower inflation. Monetary policy works like a chain reaction or sequence of events. But that sequence takes time. Both history and research tell us that changes to the Bank’s policy rate affect different households and sectors of the economy differently and at different speeds.1 If you’re making a big purchase or investment—one that requires a loan—you’ll feel the impact of higher rates immediately. And the sectors that are most sensitive to changes in interest rates are the ones that cool first. The housing sector is a clear example of this. Most people take out a mortgage to buy a house. An increase in mortgage rates may cause us to delay a purchase or to purchase a less expensive house. This leads to a slowdown in housing activity. As housing activity slows, people tend to spend less on furniture and other housing-related goods. It takes longer for monetary policy to bring down price growth in other goods and services—especially services—because they aren’t directly tied to borrowing. Instead, they adjust over time as overall spending moderates. Let me turn now to our deliberations leading up to yesterday’s decision. Not surprisingly, Governing Council discussed how the economy has evolved since July. We noted that while the Canadian and global economies are showing signs of slowing, the Canadian economy is clearly in excess demand. Although growth in gross domestic product in the second quarter was slightly weaker than we had projected in July, consumption and business investment grew at a significant pace. Labour markets are tight, and inflation is high and broadening. With short-term inflation expectations remaining high, and all three of the Bank’s core measures of inflation moving up, Governing Council discussed the ongoing risk that inflation becomes entrenched. The longer inflation expectations remain high, the greater the risk that elevated inflation becomes entrenched. If that were to happen, higher inflation could become self-fulfilling, and a damaging cycle would be set in motion. We want to ensure this scenario does not materialize because if it does the economic cost of restoring price stability will be much higher. This led to our decision to raise the policy interest rate by 75 basis points to 3.25%. By front-loading interest rate increases now, we’re trying to avoid the need for even higher interest rates down the road and a more pronounced slowing of the economy. Given the outlook for inflation, we continue to judge that the policy interest rate will need to rise further. As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target. 1 T. Chernis and C. Luu, “Disaggregating Household Sensitivity to Monetary Policy by Expenditure Category,” Bank of Canada Staff Analytical Note No. 2018-32 (October 2018). Looking ahead Going forward, our primary focus will be to judge how monetary policy is working to slow demand, how fast supply challenges are resolved, and most importantly, how both inflation and inflation expectations respond. Let me discuss each in turn. On the demand side, we’ll be keeping a close eye on how global developments and commodity prices affect our exports and business investment as well as how this translates into pricing decisions. As higher inflation and interest rates constrain household budgets, consumer spending should moderate in both goods and services. However, we know Canadians have accumulated extra savings during the pandemic, so there is a risk that consumer spending has more momentum than we expect, making inflation more persistent. As labour demand eases from excessive levels, pressure on wages and prices—and therefore inflation—should also recede. And of course, we will continue to monitor the adjustment in housing activity and prices. On the supply side, unexpected global events could further disrupt supply and push prices up even more. We’ll be watching to see if supply disruptions are improving, especially in hard-hit sectors such as motor vehicles. Will improvements to global supply bottlenecks continue? And how quickly will this translate into easing of supply constraints and lower costs for Canadian firms? Similarly, the Bank will continue to monitor a broad set of indicators to see if labour shortages are subsiding. Finally, as demand and supply come back into balance, we will examine how inflation and inflation expectations respond. This includes looking at the nearterm momentum, in particular that of our measures of core inflation, to assess how broad and entrenched pricing pressures are. Meanwhile, survey results will help us see if the short-term inflation expectations of consumers and firms are coming back down. This will be an important sign that monetary policy is working and that Canadians are beginning to feel some relief. Given the lag between changes to interest rates and their impact on inflation— and the considerable uncertainty surrounding the outlook—getting inflation all the way back to 2% will take some time. We also know there could be bumps along the way. This is why our ongoing and careful assessment of the economy and inflation is so important. We remain resolute in our goal to re-establish low, stable and predictable inflation. Canadians should be able to plan their spending and savings decisions without having to worry about the rising cost of everyday essentials. Conclusion Let me conclude by going back to where I started—harvest time in Alberta As a kid I spent time on my grandparents’ farm, and I remember my grandfather telling me he needed three eyes at harvest time: one for the weather, one for the calendar, and one for the crops. I also remember many long days and sleepless nights until the crops were off the field. It’s a bit like that at the Bank of Canada right now. We have a careful eye on many different things—we have a lot of work ahead of us, and we will not rest easy until we can get inflation back to target. We are determined to get this job done.
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Remarks by Mr Paul Beaudry, Deputy Governor of the Bank of Canada, at the University of Waterloo Faculty of Arts Distinguished Lecture in Economics, Waterloo, Ontario, 20 September 2022.
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Remarks by Paul Beaudry Deputy Governor University of Waterloo Faculty of Arts Distinguished Lecture in Economics September 20, 2022 Waterloo, ON Macroeconomics of the 2020s: What we’ve learned, and what’s to come Introduction Good afternoon, and thank you for inviting me to present this year’s Distinguished Lecture in Economics. I’m honoured to be the ninth lecturer to take this stage. I would especially like to thank Professor Francisco Gonzales for thinking of me for today’s talk. Francisco and I have known each other for almost 20 years and have discussed many economic issues during that time. I hope that some of the concepts I will address today—especially spillovers and the value of coordination—will resonate with him, and with students who have had the pleasure of taking his classes. I’m very happy to be here in person after more than two years of virtual and hybrid events. COVID-19 has certainly disrupted many aspects of our lives—our physical and mental well-being, and our ability to study and work. Unfortunately, some of us even lost loved ones to this deadly virus. It goes without saying that the pandemic has also had unprecedented effects on the domestic and global economies. Never before had the entire world effectively battened down the hatches so quickly and all at once. And never before had we experienced the roller coaster of re-openings and closures that has taken place since March 2020. Now we’re also dealing with supply chain disruptions, war in Ukraine and inflation that’s higher than we’ve seen in decades. When COVID-19 first hit, the Bank of Canada—and many other central banks— took a series of actions. Some were new and innovative in response to the situation before us. Others stemmed from the playbooks we used during other crises. This is a key approach to policy-making: we draw from past experiences to figure out what actions will best support the economy, keep inflation on target and protect the well-being of households and businesses. I would like to thank Thomas Carter and Nicholas Sander for their help in preparing this speech. Not for publication before September 20, 2022 3:30 pm Eastern Time -2Looking back now, I believe we got a lot of things right when trying to manage the economic fallout from the pandemic. But in other areas, we could have done better. So today, with the benefit of hindsight, I want to talk about some early lessons we can draw from this episode. I’ll discuss what worked, and where we could improve our response to future downturns.1 I’ll focus specifically on three issues. The first is how international spillovers have been shaping the macroeconomic landscape. Here I’m thinking about how countries responded to and are recovering from the pandemic, and how policy-makers’ actions in individual countries affected global outcomes. And I’ll emphasize how cross-country interactions played out differently during the pandemic than they did in other recessions, such as the one that followed the 2008–09 global financial crisis (GFC). Second, I’d like to compare the strong rebound that we’ve seen in the labour market with the jobless recoveries that advanced economies sometimes experienced in the past. Here I’ll stress how these differences partly reflect the way policy shaped the evolution of public and private sector balance sheets. Finally, I’ll look ahead to an issue on so many minds these days: inflation. Just this morning new numbers were released. In August, inflation stood at 7%. While we’re headed in the right direction, that’s still too high. Consumers and businesses are rightfully wondering when we’ll stop feeling the pinch of high prices. And so I’ll talk about the role that expectations play in driving inflation, how central banks try to influence those expectations and what this means for the Bank of Canada as we guide inflation back to our 2% target. International policy spillovers Let’s start by noting that Canada has a small open economy, accounting for less than 1.5% of global gross domestic product. We are integrated with, and dependent on, global trade partners. So what happens elsewhere has significant impacts on the Canadian economy. This situation isn’t unique to Canada. Most countries are small in this sense. Accordingly, policy-makers in individual countries often take global conditions as given. This means they focus on making monetary and fiscal policy choices that best serve their national interests. They may not necessarily internalize all the spillovers those choices might impose on other countries. Now, it’s not always possible or appropriate to act in ways that consider these spillovers. But it’s important to understand how the policy choices of individual countries collectively determine the overall level of global stimulus and to consider whether that level is appropriate. Accordingly, spillovers are a regular topic on the agendas for international forums like the G7 and G20. The 1 See Bank of Canada, “Appendix: Main factors behind inflation forecast errors,” Monetary Policy Report (July 2022): 26–29, for a discussion of our recent inflation forecast errors. -3conversations we have around those tables can help identify areas where some degree of coordination could make all countries better off. Of course, spillovers are complicated, and modelling and measuring them are challenging. However, during periods when many countries are recovering from large global shocks—like COVID-19 or the GFC—we can look at spillovers as operating mainly through two dimensions. The first is a real activity dimension. Stimulus in one country boosts imports of goods and services from other countries, raising demand around the globe and thereby supporting the recovery. The second is the inflation dimension. It relates to how stimulus measures also raise prices for many internationally traded goods. And during COVID-19, unprecedented supply chain disruptions caused an additional layer of problems. I talked earlier about how policy-makers looked back on previous crises when navigating the pandemic. A lot of literature on policy-makers’ responses to the GFC and its aftermath focuses on the real activity dimension. Specifically, some research proposes that slower withdrawals of fiscal stimulus following the GFC could have made all countries better off through positive demand spillovers. Put differently, a more gradual global withdrawal process could have allowed each country to benefit more fully from the demand boost triggered by its trading partners’ stimulus efforts.2 That lesson has coloured many fiscal policy-makers’ thinking as we come out of COVID-19, with many conversations at the international level focused on avoiding premature withdrawals of stimulus.3 However, no two crises are created equal. A distinctive feature of the GFC was that many sectors and countries were left facing levels of demand well below available supply, and for extended periods of time. This excess capacity meant that price pressures associated with stimulus measures were modest. The inflation dimension was therefore a relatively small part of the overall story during this period. The COVID-19 crisis was clearly very different. Even when countries were experiencing excess supply overall, key sectors were operating at or near capacity limits, including many sectors that rely on internationally traded goods. Bottlenecks occurred in these sectors because of demand surges driven by a combination of stimulus policies, shutdowns and re-openings as well as by consumers shifting away from services. 2 See G. B. Eggertsson, N. R. Mehrotra, S. R. Singh and L. H. Summers, “A Contagious Malady? Open Economy Dimensions of Secular Stagnation,” IMF Economic Review, 64 no. 4 (2016): 581– 634; and R. Caballero, P.-O. Gourinchas and E. Farhi, “Global Imbalances and Currency Wars at the ZLB,” Centre for Economic Policy Research Discussion Paper No. 10905 (2015). 3 A press release issued following a February 2021 meeting of G20 finance ministers and central bank governors noted that the group had “discussed the benefits stemming from joint action and strong policy cooperation and concurred that a premature withdrawal of the support measures should be avoided.” In a letter released around the same time, the US Treasury Secretary Janet L. Yellen also urged G20 countries to “avoid withdrawing support too early,” stressing that “[t]ogether, our efforts will be greater than the sum of our individual responses.” -4Normally when demand goes up following a recession, supply responds strongly. But during the pandemic, supply couldn’t keep up because of public health protocols and shutdowns. This caused delays in consumers getting their hands on goods like bicycles and furniture. So prices rose more sharply than usual. Compared with the GFC, this resulted in a stronger response on the inflation dimension and a weaker response on the activity dimension. So one country’s decision to maintain stimulus disproportionately impacted others through the effects of that stimulus on the prices of globally traded goods. For instance, as US stimulus spread through the economy and led to a greater demand for new vehicles, Taiwan—a key manufacturer of microchips needed to make modern vehicles—was struggling to adapt its production processes and facing long backlogs of orders. Instead of stimulus-induced demand leading to more output, this bottleneck meant global automobile production stalled and prices increased—not only in the United States, but also in Canada and around the world. The net result was that, during the recovery phase of the pandemic, it’s likely a somewhat faster global withdrawal process could have made all countries better off. To summarize, lessons from the GFC informed key parts of the policy response to the pandemic. However, in hindsight, policy-makers everywhere should have been more alert to the possibility that the nature of global spillovers can change over time. A better understanding of these dynamics and how policy actions can ripple around the world should enable more effective global responses to future shocks. Labour market recoveries and balance sheets Next, I’d like to discuss how the labour market has recovered from the pandemic. I’ll also talk about the role that balance sheets have played in making that recovery stronger than recoveries following previous downturns. The left-hand panel of Chart 1 shows how unusual the recovery phase of the pandemic has been relative to historical experience. Despite an unprecedented initial drop, Canadian employment took only about 20 months to return to its prerecession peak. This is about 6 months faster than we experienced coming out of the GFC, and at least 18 months ahead of the tepid recoveries that followed recessions in the 1980s and 1990s. As shown in the right-hand panel, the difference in the recoveries following COVID-19 and the GFC was even more pronounced in the United States. Research and history teach us a lot about the forces that made many previous recoveries so slow. One lesson is that recessions that take a significant toll on the financial health of businesses, financial institutions or households are often followed by weak recoveries.4 4 See R. C. Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession (Singapore: John Wiley & Sons (Asia) Pte. Ltd., 2009); A. Mian and A. Sufi, “What Explains the -5Chart 1: Relative to past downturns, employment in Canada and the United States recovered quickly from the COVID-19 recession Index: last pre-recession peak level of employment = 100, seasonally adjusted, monthly data a. Employment in Canada Index b. Employment in the United States Index 8 12 16 20 24 28 32 36 Months since last pre-recession peak in employment 8 12 16 20 24 28 32 36 Months since last pre-recession peak in employment COVID-19 recession 1981–82 recession COVID-19 recession 1981–82 recession 1990–91 recession 2001 recession 1990–92 recession 2008–09 recession 2007–09 recession Sources: Statistics Canada, US Bureau of Labor Statistics and Bank of Canada calculations Last observation: August 2022 A good example is the United States during the GFC, when a collapse in house prices left many indebted households and financial institutions over-leveraged or even in negative net wealth positions. That set the scene for what’s known as a “balance sheet recession.” During this type of recession, key parts of the private sector are focused on rebuilding healthier balance sheets. That rebuilding process takes time. Paying down debt and accumulating savings may be good in the long term. But, in the short term, having many firms and households preoccupied with these issues doesn’t support strong demand and a fast recovery. Even for economies not directly impacted by the initial underlying shocks—like Canada during the GFC—having a trading partner caught in these balance sheet headwinds can be a major drag. This is an example of what economists call the “paradox of thrift,” a situation where savings decisions that seem sensible at the individual level lead to insufficient spending overall. In other words, too much personal savings can be a drag on overall economic growth during recessions and recoveries. Another example of this paradox is when the risk of unemployment rises during a recession, leading some households to cut back on spending and focus on building precautionary savings. This may make sense for individuals, but it takes a toll on total spending and demand. As businesses respond to that weaker 2007–2009 Drop in Employment?” Econometrica 82, no. 6 (November 2014): 2197–2223; and G. B. Eggertsson and P. Krugman, “Debt, Deleveraging, and the Liquidity Trap: A Fisher-MinskyKoo Approach,” Quarterly Journal of Economics 127, no. 3 (August 2012): 1469–1513. -6demand, they can even set off a self-fulfilling spiral of higher unemployment and stronger precautionary savings incentives, worsening the initial downturn.5 It’s easy to imagine how such mechanisms could have resulted in a much deeper downturn and slower recovery associated with COVID-19. Luckily, policy-makers had learned from previous episodes, and their strong responses over the past two and a half years helped prevent the unusual savings and balance sheet dynamics that often hobble recoveries. Fiscal policy measures clearly prevented a worse outcome. These included a range of wage and income supports that helped preserve private sector balance sheets and supported consumption. Monetary policy played an important supporting role. For example, disruptions in financial markets in early 2020 could have layered a serious financial crisis on top of a devastating health crisis. But central banks around the world aggressively lowered their policy rates and deployed a range of facilities that kept markets functioning and credit flowing. And the next two years saw central banks use forceful combinations of conventional and unconventional stimulus to support consumption and guide their economies to strong recoveries. As you’ll see in Chart 2, these fiscal and monetary policy measures effectively expanded public sector balance sheets to offset pressures that would have strained balance sheets in the private sector. Of course, such policy measures are not without their costs or risks. And taking prudent steps to normalize government and central bank balance sheets is important to help bring down inflation today and ensure room to respond to future downturns. At the Bank of Canada, this normalization is underway with our quantitative tightening program. 5 See M. O. Ravn and V. Sterk, “Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach,” Journal of the European Economic Association 19, no. 2 (April 2021):1162–1202. -7Chart 2: Total government expenditures and central bank assets increased in several advanced economies Percentage of gross domestic product, annual data (panel a), quarterly data (panel b) a. Total general government expenditures b. Total central bank assets % % % Canada Euro area United Kingdom United States Japan Note: For some countries, 2021 values are preliminary. Source: International Monetary Fund via Haver Analytics Last observation: 2021 Bank of Japan (left scale) Bank of Canada (right scale) US Federal Reserve (right scale) European Central Bank (right scale) Bank of England (right scale) Sources: Bloomberg and Bank of Canada calculations Last observation: 2022Q2 All told, there are encouraging lessons to be learned from the speed and scale with which policy-makers were able to marshal stimulus measures in response to COVID-19. This allowed the Canadian and other economies to bypass many of the pain points that often follow recessions—setting the scene for a historic bounce back in labour markets. With many students in the audience, I’ll also stress that young people— especially those who recently entered the labour market—have been key beneficiaries of this. In past recessions, scarring effects meant that people entering the labour market often took years to catch up to other cohorts.6 I certainly don’t want to imply that coming into the labour market over the past few years has been easy. But the rapid recovery and abundant employment opportunities have meant that new entrants are better positioned to find jobs that match their qualifications. That’s helped many young people start their careers on firm footing, which is good news for them and for our economy. Managing expectations to tame inflation While the previous two topics come with the benefit of hindsight, my final topic is something we’re still squarely in the middle of—the ongoing battle to bring inflation back to our 2% target. Giuliano and A. Spilimbergo, “Growing up in a Recession,” Review of Economic Studies 81, no. 2 (April 2014): 787–817; and J. G. Altonji, L. B. Kahn and J. D. Speer, “Cashier or Consultant? Entry Labor Market Conditions, Field of Study, and Career Success,” Journal of Labor Economics 34, no. S1 (January 2016): S361–S401. 6 See P. -8Since we introduced inflation targeting in 1991, the Bank has been largely successful at keeping inflation low, stable and predictable. Because of this, Canadians had grown to expect that this would remain the case. So they generally behaved accordingly, making saving and spending decisions and salary demands based on inflation running around 2%. Today, that record is being seriously tested as we emerge from the first global pandemic in a century and face the effects of Russia’s unprovoked invasion of Ukraine. Both factors are contributing to inflation levels well above our target while also raising short- and medium-term inflation expectations as seen in Chart 3. Monetary policy is actively tightening to cool the economy and contain these pressures. Chart 3: The inflation and wage growth expectations of households and firms have increased Quarterly data a. Households (CSCE) % b. Firms (BOS and BLP) % Inflation expectations: 1-year-ahead Inflation expectations: 2-year-ahead Inflation expectations: 5-year-ahead Wage growth expectations: 1-year-ahead Inflation expectations: 2-year estimate (BOS) Wage growth expectations: 1-year estimate (BOS) Inflation expectations: 1-year (BLP) Inflation expectations: 2-year (BLP) Inflation expectations: 5-year (BLP) Note: CSCE is the Canadian Survey of Consumer Expectations, BOS is the Business Outlook Survey, and BLP is the Business Leaders' Pulse survey. Source: Bank of Canada Last observation: 2022Q2 Against this backdrop, a lot of discussion involves what monetary policy should do to minimize the risk that inflation expectations will drift persistently above our target. This is a process known as “de-anchoring,” and it can be associated with the self-fulfilling wage-price spirals that I warned against in my last speech.7 To avoid this and bring inflation sustainably back to target, some have suggested that policy-makers may need to engineer a substantial slowdown—or even a recession. 7 See P. Beaudry, “Economic progress report: Navigating a high inflation environment” (speech to Gatineau Chamber of Commerce, Gatineau, Quebec, June 2, 2022). -9I want to address these concerns. The best strategy for responding to high inflation—and, most importantly, for avoiding de-anchoring—depends partly on how people form their inflation expectations. So let me start with two very different theories of expectation formation and what they mean for the disinflation process. The first theory assumes that inflation expectations are backward-looking—or what economists call “adaptive.” This means that households and businesses base their inflation expectations on past inflation, without trying to forecast how the future might differ from the past. Essentially, this theory says that people don’t believe anything the central bank may say about inflation until they’ve seen it for themselves. An adaptive-expectations view implies that when inflation is high, inflation expectations will drift up, and central banks can’t rely on simple communication about future policy to bring them back down. Instead, policy-makers must engineer a period of sufficient economic slack so that inflation falls, and these lower inflation outcomes then feed back into lower expectations over time. Researchers sometimes liken this to a process of earning credibility. This is because what eventually brings realized and expected inflation sustainably back to target is policy-makers showing that they’re willing to tolerate a sizable downturn to get there. The second theory is the polar opposite—that expectations are what economists call “rational.” This theory assumes that firms and households are forwardlooking and understand the economy and how monetary policy affects it. In particular, businesses and households are assumed to be capable of the mental gymnastics needed to process incoming data and assess their likely implications for future outcomes. Under this rational-expectations view, people’s understanding that appropriate policy choices will eventually bring inflation back to target can help keep expectations close to target during periods of high inflation. To achieve this outcome, central banks must commit to an inflation target and communicate this clearly to households and firms. If the commitment is credible, then the private sector’s anticipation that inflation will return to target in the long term sets off a series of price- and wage-setting decisions. And these decisions help keep inflation in line over the short and medium terms. This greatly reduces the need to engineer a period of significant economic slack to get back to target on a sustainable basis. The truth, as you can imagine, lies somewhere between these theories. History is helpful here. For example, an extensive literature focuses on the disinflation that Paul Volcker implemented as Chair of the US Federal Reserve in the 1980s.8 It 8 See M. Goodfriend and R. King, “The incredible Volcker disinflation,” Journal of Monetary Economics 52 (2005): 981–1015; N. G. Mankiw, R. Reis and J. Wolfers “Disagreement about Inflation Expectations,” NBER Macroeconomics Annual 18 (2003): 209–249; S. Kozicki and P. A. Tinsley, “Term structure views of monetary policy under alternative models of agent expectations,” Journal of Economic Dynamics and Control 25, no.1–2 (2001): 149–184; and C. G. - 10 suggests that the associated downturns were larger than assumed with purely rational expectations, but they were not as severe as purely adaptive expectations would assume. At some level, you don’t need an economist to tell you this. No one naïvely assumes that just because inflation is high today, it will stay there. Instead, people try their best to understand the economic environment and form expectations based on that understanding. However, that environment is complicated, so the mental gymnastics associated with fully rational expectations feels understandably foreign. In a stable environment where the central bank has established a credible track record, as a rule of thumb the private sector can quite safely assume that inflation will evolve close to target. Firms can then make price- and wage-setting decisions accordingly, and that generally leads to inflation outcomes not far from target. This has largely been the case in Canada for decades. However, with inflation now well above our target and its future trajectory uncertain, many firms feel less confident applying the rule of thumb I just described. Instead, they must directly confront the complexity of the economic environment, relying more heavily on their own knowledge and reasoning to predict inflation outcomes. This is where direct, effective monetary policy communication has an important role to play—helping to guide and coordinate these difficult reasoning processes.9 An important part of our mandate as Canada’s central bank is to provide coherent, clear and relatable messages to those we serve. Equally important is reaching out to hear how our policies affect everyone. We are a public institution working on behalf of all citizens. Speaking and listening to Canadians is at the core of building trust and accountability. As the Governor recently put it, with so much uncertainty already out there, we don’t want monetary policy to be an additional source of uncertainty. This is why the Bank is committed to keeping its communications during this difficult period clear, simple and focused on our inflation mandate. Our messages are designed to cut through the noise and simplify the difficult problems facing price- and wage-setters in this unusual environment. The more effective the Bank can be in its guiding role, the greater the chance of a soft landing—and the lower the risk of a hard landing. Conclusion It’s time for me to conclude. The COVID-19 pandemic has certainly brought its fair share of challenges to Canadian households, businesses and policy-makers. While experience from Huh and K. J. Lansing, “Expectations, credibility, and disinflation in a small macroeconomic model,” Journal of Economics and Business 52, no.1–2 (2000): 51–86. 9 For more on this point, see P. Beaudry, T. J. Carter and A. Lahiri, “Looking Through Supply Shocks versus Controlling Inflation Expectations: Understanding the Central Bank Dilemma,” Bank of Canada Staff Working Paper No. 2022-41 (September 2022). - 11 past crises has played an important role in guiding our decisions, we truly have much more to learn. We at the Bank will continue to listen to Canadians, analyze the situation and grow our knowledge in order to best respond to downturns in the economy. We will work with our international partners to continuously improve how we respond as a group to shocks like the pandemic that have implications far beyond our own country’s borders. We will continue to pay close attention to how this recovery differs from others we’ve experienced. This includes keeping an eye on the health of the labour market and on how public and private sector balance sheets evolve over time. And, most importantly, we will continue to take whatever actions are necessary to restore price stability for households and businesses and to maintain Canadians’ confidence that we can deliver on our mandate of bringing inflation back to 2%. Thank you for your time, and I look forward to our discussion.
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Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Halifax Chamber of Commerce, Halifax, Nova Scotia, 6 October 2022.
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Remarks by Tiff Macklem Governor of the Bank of Canada Halifax Chamber of Commerce October 6, 2022 Halifax, Nova Scotia What’s happening to inflation and why it matters Introduction Good afternoon. I am glad to be with you here in Halifax. It’s been a tough couple of weeks for Atlantic Canada. I want to extend my condolences for the lives lost during the terrible storm. My sympathy goes out to all of those affected across the region, including Bank of Canada employees in our office here in Halifax. The damage and destruction bring a new wave of hardship after what has already been a difficult couple of years. Canadians have faced historic challenges since 2020. And recovering from these challenges—just like rebuilding from the aftermath of Hurricane Fiona—will take time. The global COVID-19 pandemic has sparked a challenge that is particularly pressing to the Bank of Canada—high inflation. And that’s what I want to talk about today. High inflation is making life more difficult for Canadians, especially those with low or fixed incomes. Some of this inflation reflects global developments that we don’t control, but inflation in Canada increasingly reflects what’s happening in Canada. The demand for goods and services here at home is running ahead of the economy’s ability to supply them. Businesses are having a hard time finding enough workers. And what started as higher prices and delays for many internationally produced goods has broadened to many services. Inflation in Canada peaked at 8.1% in June and has declined for two months. That’s welcome news, but inflation will not fade away by itself. To get it back to more normal levels, we need to slow spending in the economy so supply can catch up with demand. This will help relieve price pressures here in Canada. In September, we raised our policy interest rate for the fifth consecutive time since March. And we indicated that interest rates will likely need to go higher still to bring inflation down to the 2% target. Later this month, we will take our next monetary policy decision, and we will update our economic outlook for growth and inflation at that time. But today I want to do three things. First, I want to unpack the run-up in inflation over the past year or so and review how the factors behind inflation in Canada I would like to thank Erik Ens for his help in preparing this speech. Not for publication before October 6, 2022 11:35 Eastern Time -2are shifting from global to domestic and from goods to services. Second, I want to review the inflation indicators we are particularly focused on as we assess where inflation is headed. Finally, I want to acknowledge the hardship that high inflation is creating for many Canadians and underscore the imperative of getting inflation all the way back to the 2% target. The sources of inflation are broadening Heading into the pandemic in 2020, Canada’s total consumer price index (CPI) inflation was 2.2%—roughly on target. But when the world locked down, inflation fell steeply, dipping below zero. Prolonged deflation and economic depression were real concerns. The Bank responded with exceptional monetary support, first to put a floor under the crisis and then to help the economy regain its strength. Fortunately, combined with exceptional fiscal stimulus, it worked. We avoided deflation, and the deepest recession on record was followed by the fastest recovery ever. But repeatedly closing and reopening economies around the world brought new challenges. Households shifted their spending from in-person services to durable goods, straining global supply chains that were already disrupted by public health restrictions. Shipping bottlenecks and shortages of key intermediate inputs meant long delays for goods like cars, bicycles and appliances. So by 2021, we began experiencing higher prices for many internationally traded goods. As Chart 1 shows, inflation in goods excluding food and energy rose to about 3.5% by July 2021, while inflation in services excluding shelter was only around 1%. Add in higher global energy prices in 2021, and goods price inflation was about 4.5% by the middle of that year. Chart 1: Inflation started in goods and spread to services Year-over-year percentage change % 9.0 7.0 5.0 3.0 1.0 -1.0 Goods excluding food and energy Sources: Statistics Canada and Bank of Canada calculations Services excluding shelter Total inflation Last observation: August 2022 With higher goods prices, total CPI inflation was moving up in 2021 too, but it was largely a story of higher inflation for global goods spilling into Canada. -3Inflation was rising in most advanced economies, and Canadian households were feeling the effects of higher global inflation (Chart 2). Chart 2: Inflation has risen globally Total CPI, year-over-year percentage change % -4 France Japan New Zealand Germany United Kingdom United States Italy Australia Canada Note: Australia and New Zealand are using quarterly data, all other countries use monthly data. Last observations: Sources: Statistics Canada and Organisation for Economic Co-operation Australia and New Zealand 2022Q2; and Development via Haver Analytics all others, August 2022 At the time, we assessed that the effect of these global forces on inflation was likely to be transitory. Historical experience has taught us that supply disturbances typically have a temporary effect on inflation, so we tend to look through them. A year ago we expected inflation in goods prices to moderate as public health restrictions were eased, production ramped up and investment in global supply chain logistics picked up. In hindsight, that turned out to be overly optimistic. Indeed, global inflationary pressures stepped up in 2022. The unprovoked Russian invasion of Ukraine in February drove up the prices of commodities— particularly energy and agricultural goods—and created new disruptions to already impaired global supply chains. Canadians experienced these effects almost immediately with higher gas prices at the pump and big price increases for many basic food items at the grocery store. But the other thing that changed in 2022 was inflation in the prices of services. As the economy fully reopened in the spring, pent-up demand for all the services we’d missed over the pandemic started driving up their prices, especially in areas like travel and recreation. Canadians experienced these pressures first-hand when trying to book a campsite or reserve a table at their favourite restaurant. Services price inflation rose quickly through the first half of 2022, reaching about 5% this summer. With further increases in goods prices in 2022 and a rapid rise in services prices, total CPI inflation rose sharply, reaching 8.1% in June. -4Over the last two years, the pandemic and the war have affected lives and livelihoods. They have also had a profound impact on inflation. Our job at the Bank of Canada is to restore price stability. Global inflation may be starting to ease In the last two months, headline inflation in Canada has come down to 7%. This largely reflects lower gasoline prices. In mid-June, filling up in Halifax cost $2.15 a litre on average. By the end of August, that had fallen to $1.64. More generally, there is some evidence that global inflationary forces have begun to ease, though they remain elevated. A range of global commodity prices are starting, finally, to fall from their highs. Oil prices have come down, and the prices for key agricultural commodities have also eased back. In time, with lower input and transportation costs, we should see food inflation begin to come down. Supply bottlenecks have also begun to improve (Chart 3). Chart 3: Global supply bottlenecks are beginning to ease but remain elevated Monthly data Index Index PMI manufacturing supplier delivery times (seasonally adjusted, +50 indicates lengthening) (left scale) PMI manufacturing input prices (seasonally adjusted, +50 indicates increasing) (left scale) Harper Petersen shipping cost index (2019 = 100) (right scale) Ships in queue at Los Angeles and Long Beach (2019 = 100) (right scale) Note: "Ships in queue at Los Angeles and Long Beach" is an "end-of-period value". "Harper Petersen shipping cost index" is an average of weekly data. Sources: Harper Peterson, The Marine Exchange of Southern California and S&P Global via Haver Analytics Last observation: September 2022 Global manufacturers report that delivery times are still longer than usual, but they are getting shorter, and input cost pressures are easing. Global shipping costs have also come down from exceptional highs. These signs of improving global supply chains are encouraging, but we can’t count on easing pressure on global prices to lower inflation in Canada. At a minimum, improving global factors will take time to filter through to Canadian inflation. And the recent depreciation of the Canadian dollar in the face of USdollar strength will offset some of this global improvement by making US goods and vacations more expensive for Canadians. There is also considerable uncertainty about the evolution of global supply chains and commodity prices. The global economy remains highly disrupted by the effects of the pandemic and -5the war in Ukraine. Predicting international price movements isn’t easy, and the global inflation picture could change quickly. Unfortunately, we don’t have much influence over that. Our focus is getting domestic inflation down and keeping inflation expectations anchored We can’t control global developments. But we can use monetary policy to influence the balance between demand and supply in the Canadian economy and therefore ease domestic inflationary pressures over time. All the signs today point to an economy that is clearly in excess demand. Labour markets remain very tight. Job vacancies have eased a little in recent months but remain exceptionally high. Our business surveys report widespread labour shortages. And wage growth has risen and continues to broaden. With demand running ahead of supply, competition is posing less of a restraint on price increases, and businesses are passing through higher input costs more quickly. As a result, higher energy and material costs are showing up in the prices of a growing list of goods and services. So even if there is some relief at the gas pumps, price pressures remain high and continue to broaden. In August, the prices of more than three-quarters of the goods and services that make up the CPI were rising faster than 3% (Chart 4). Chart 4: Inflationary pressures remain broad-based Share of CPI components that are growing % Above 3% Sources: Statistics Canada and Bank of Canada calculations Above 5% Above 7% Last observation: August 2022 Simply put, domestic inflationary pressures have yet to ease. That doesn’t mean higher interest rates are not working, but it will take time. By raising interest rates, we are making it more expensive for households and businesses to borrow and therefore to spend. In five steps since March, we have raised the overnight policy rate from 0.25% to 3.25%—one of the steepest and fastest tightening cycles we’ve ever conducted. And we are starting to see some effect. Some interest- -6rate-sensitive sectors of the economy have begun to cool. The housing market had overheated to unsustainable levels early in the pandemic due to low supply, increased demand for larger homes and low mortgage rates. With higher rates now constraining borrowing, the sector has cooled. But monetary policy takes time to work its way through the whole economy. Households or businesses making a big purchase or investment—one that requires a loan—are feeling the impact. It takes longer for monetary policy to bring down price growth in other goods and services—especially services— because they aren’t directly tied to borrowing. Instead, they adjust over time as overall spending moderates. What we’re watching In her September economic progress report, Senior Deputy Governor Carolyn Rogers outlined what the Bank is monitoring to guide our decisions in the months ahead. She explained that we will focus on how monetary policy is working to slow demand, how supply challenges are resolving, and, most importantly, how both inflation and inflation expectations are responding. I want to drill down on these latter two elements: measures of core, or underlying, inflation and measures of inflation expectations. These are critical guideposts for us as we seek to bring total CPI inflation all the way back to the 2% target. Core inflation As we look for a more fundamental turning point in inflation, measures of core inflation are becoming increasingly relevant. We are an inflation-targeting central bank, and we target total CPI inflation— calculated using a basket of goods and services that represents what Canadians typically buy. But parts of the overall CPI basket are sometimes highly volatile in ways not related to broader price pressures—this can be the case for gasoline and food prices. That’s why policy-makers like to look at what we call “core” inflation to gauge persistent price movements. Core inflation provides a sense of the underlying trend in total CPI inflation and relates more closely to the balance between demand and supply in our economy. In practice, there are different ways to measure core inflation. Traditionally, central banks in many countries have measured core inflation by excluding volatile components like food and energy.1 The drawback of these exclusionbased measures is that the components that are volatile can change over time— something we have experienced in a big way in the last couple of years. We continue to monitor various exclusion-based measures of core inflation, but since 2016, the Bank has focused on three more-statistical measures of core inflation. CPI-median and CPI-trim strip out whatever is volatile at the time. The third measure, CPI-common, is based on a statistical technique that captures the 1 CPIX is an example of an exclusion-based measure of core inflation. It excludes eight volatile components of the CPI and the effects of changes in indirect taxes. The Bank of Canada used CPIX as its primary measure of core inflation from 2001 to 2016. -7common component in the price changes across many goods and services. This captures the idea that inflation reflects a general increase in prices. We use three measures of core inflation because no single measure is best. Depending on the circumstances, one may be a better indicator of inflationary pressure, and their diversity is their strength. With inflationary pressures as strong as they are, all three measures have risen. They currently range between 4.8% and 5.7% (Chart 5). What they are telling us is that even after taking out components in the CPI that are volatile or don’t reflect generalized changes in prices, inflation is running about 5%. That’s too high. We can also see that our core measures have yet to decline meaningfully even though total CPI inflation has come down in the last couple of months. Going forward, we will be watching our measures of core inflation closely for clear evidence of a turning point in underlying inflation. Chart 5: Core measures show strong underlying inflationary pressures Year-over-year percentage change % 9.0 7.0 5.0 3.0 1.0 -1.0 CPI-common CPI-common (real time) CPI-trim Total CPI CPI-median Note: Real-time refers to the initial unrevised reading of CPI-common over each month of the pandemic. Sources: Statistics Canada and Bank of Canada calculations Last observation: August 2022 Of our three measures, CPI-common is becoming more difficult to use in real time because it has been subject to large historical revisions. With price movements becoming much more generalized in the last year, what is included in the common component has changed considerably.2 CPI-trim and CPImedian, in contrast, are more robust to changes in the behaviour of prices. 2 In Chart 5, the dotted line is the originally reported value of CPI-common, while the red line is the historically revised series. As you can see, in real time, CPI-common rose less than CPI-trim and CPI-median through the pandemic. With historical revisions, the three measures are now similar. For a review of the revisions to CPI-common, see E. Sullivan, “Examining recent revisions to CPI-common,” Bank of Canada Staff Analytical Note (forthcoming). -8These measures appear to have performed well and have been subject to much smaller revisions. With this in mind, we are more focused on these two measures and we are reassessing CPI-common. The extreme events of the pandemic have stressed Canadians. They have also stressed some of our indicators and highlighted the benefits of using a variety of measures. Inflation expectations In addition to measures of inflation, we are also closely watching inflation expectations. Keeping longer-term expectations of inflation well anchored is paramount so that, as inflation pressures ease, inflation returns to the 2% target. The longer high inflation persists and the more pervasive it becomes, the greater the risk that high inflation becomes entrenched. In particular, if high inflation pushes wages up and higher labour costs then push inflation up further, inflation expectations can become unmoored and high inflation can become self-fulfilling. We can’t let that happen because if it does, it will be much more costly to return inflation to target.3 That’s why we are so focused on measures of expected inflation. We use a range of surveys and market-based measures to assess expectations of future inflation, and they show us that near-term expectations have risen. Survey results also indicate that consumers and businesses are more uncertain about future inflation and more of them expect inflation to be higher for longer. So far, longer-term inflation expectations remain reasonably well anchored, but we are acutely aware that Canadians will need to see inflation clearly coming down to sustain this confidence. This increased uncertainty heightens the risk that inflation expectations could become de-anchored. Both households and businesses view inflation pressures as mostly global, but increasingly they are identifying domestic pressures—this is similar to our own view. Results from our next consumer and business surveys, which we will release later this month, will be important for our assessment of how expectations have evolved. Conclusion It’s time for me to conclude. Low, stable and predictable inflation is fundamental to a well-functioning economy with sustained growth and shared prosperity. That’s why price stability is the main objective of monetary policy in Canada. Without price stability, nothing works well. High and unpredictable inflation creates uncertainty and unfairness, distorting decisions and undermining confidence in our economic system. It erodes the value of money. It distorts and confuses the information and incentives that consumers, entrepreneurs, savers and investors rely on to make their economic 3 See Bank of Canada, “Box 3: Scenario with a wage-price spiral,” Monetary Policy Report (July 2022): 25. -9decisions. That means workers and businesses have less to show for their work, and it’s harder for everyone to plan for the future. Plain and simple, high inflation feeds frustration and creates a sense of helplessness. We want an economy where households and businesses don’t have to guess where inflation is going to be. We want an economy where the money Canadians earn from their hard work keeps its value. We want an economy where businesses have the confidence to invest. And we want an economy where workers make real wage gains underpinned by rising productivity. That is why we have taken forceful action to restore price stability. We have raised our policy interest rate by three percentage points this year in five steps, and we are reinforcing these increases with quantitative tightening. Looking ahead, the Governing Council recognizes that it will take time for past interest rate increases to have their full effect on the economy and inflation. That’s why we’ll be carefully assessing the effects of our actions as we seek to slow spending and return inflation to the 2% target. Canadian economic data over the summer have come in largely in line with our July outlook, and forwardlooking indicators suggest the economy is slowing. However, labour markets remain tight, the economy is in excess demand, and we have yet to see clear evidence that underlying inflation has come down. When combined with stillelevated near-term inflation expectations, the clear implication is that further interest rate increases are warranted. Simply put, there is more to be done. We will need additional information before we consider moving to a more finely balanced decision-by-decision approach. We know we are still a long way from the 2% target. We know it will take some time to get there. We also know there could be setbacks along the way, and we can’t afford to let high inflation become entrenched. Atlantic Canadians will rebuild after this storm as they always have. And the Bank of Canada will control inflation as it has for the last 30 years. We are resolute in our commitment to restore price stability for all Canadians. Thank you.
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 26 October 2022.
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Tiff Macklem: Release of the Monetary Policy Report Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 26 October 2022. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's policy announcement and the Bank's Monetary Policy Report (MPR). Today, we raised the policy interest rate by 50 basis points to 3.75%. This is the sixth consecutive increase since March. Quantitative tightening continues and is complementing increases in the policy rate. We also expect our policy rate will need to rise further. How much further will depend on how monetary policy is working to slow demand, how supply challenges are resolving and how inflation and inflation expectations are responding to this tightening cycle. Our decision today reflected several considerations. First, inflation in Canada remains high and broad-based. Inflation has come down in recent months, but we have yet to see a generalized decline in price pressures. Second, and related, the economy is still in excess demand-it's overheated. Households and businesses want to buy more goods and services than the economy can produce, and this is driving prices higher. Third, higher interest rates are beginning to weigh on growth. This is increasingly evident in interest-rate-sensitive parts of the economy, like housing and spending on big-ticket items. But the effects of higher rates will take time to spread through the economy. Fourth, there are no easy outs to restoring price stability. We need the economy to slow down to rebalance demand and supply and relieve price pressures. We expect growth will stall in the next few quarters-in other words, growth will be close to zero. But once we get through this slowdown, growth will pick up, our economy will grow solidly, and the benefits of low and predictable inflation will be restored. Finally, we are trying to balance the risks of under- and over-tightening. If we don't do enough, Canadians will continue to endure the hardship of 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 the economy more than needed. And we know that has harmful consequences for people's ability to service their debts, for their jobs and for their businesses. This tightening phase will draw to a close. We are getting closer, but we are not there yet. 1/3 BIS - Central bankers' speeches We are carefully assessing the effects of higher interest rates on economic activity and inflation. And we are being clear with Canadians and focusing on the job we have been assigned-to restore price stability for the benefit of all. Let me expand on these considerations and highlight the key points in the Governing Council's deliberations. The Governing Council began by assessing international developments since the July MPR. Inflation around the world is high and increasingly broad-based. With most central banks raising their policy rates to control inflation, global financial conditions have tightened rapidly. The global economy is slowing, and we revised down our projection for global growth. We also noted the emergence of financial stresses in some markets in recent months. A number of indicators suggest that global supply disruptions are easing. Oil and other commodity prices have also come down since July. Together with slower global growth, these developments suggest global inflation should come down over time. However, uncertainty is high, particularly related to Russia's invasion of Ukraine, and there is potential for more volatility in energy markets and for renewed supply chain disruptions. Turning to Canadian developments, the Governing Council devoted considerable attention to assessing inflation, inflation expectations and the balance between demand and supply in the economy. Since June, inflation in Canada has come down from 8.1% to 6.9%. Though welcome, most of that decline reflects a drop in gasoline prices. Inflation in Canada is broadbased, reflecting large increases in both goods and services prices. About two-thirds of the components of the consumer price index (CPI) have risen by more than 5% over the last year. And rising prices for essentials like groceries and rent are hitting lower income Canadians particularly hard. Because short-term movements in total CPI inflation are often dominated by swings in volatile international prices like oil prices, we are watching measures of core inflation closely for signs that price pressures in Canada are easing. Our preferred core measures have stopped rising in the last couple of months, but they have yet to show clear evidence that underlying inflation is coming down. Looking ahead, there are some early encouraging signs. Businesses have said they expect the rate of price increases for the goods and services they sell will come down. And more timely 3-month rates of core inflation have declined, although they are still averaging about 4%. We will need to see these 3-month rates come down further, and those declines be sustained. We are also looking for evidence that near-term inflation expectations are easing and that longer-term expectations are centred on our 2% target. Near-term expectations remain high and our surveys suggest that uncertainty about where inflation is headed remains unusually elevated. Looking at indicators of labour markets and economic activity, it is clear that even though the economy has started to slow, it remains in excess demand. Job vacancies have declined from their peak but remain high, and businesses continue to report 2/3 BIS - Central bankers' speeches widespread labour shortages. With the economy now fully reopened, households want to enjoy many of the close-contact services they have missed, but businesses can't keep up, and we have seen prices for services rise rapidly. Higher policy interest rates are beginning to slow demand. Higher mortgage rates have contributed to a sharp slowing in housing activity from unsustainable levels, and consumer and business spending on goods is moderating. This has led to declines in house prices and is exerting downward pressure on goods prices. Moving forward, we expect the effects of higher interest rates to continue to work through the economy, moderating household spending and business investment. Slowing global growth, particularly in the United States, will also weigh on Canadian exports. We project growth in gross domestic product (GDP) will stall through the end of this year and the first half of 2023 before picking up in the second half. Annual average GDP growth is therefore projected to decline from about 3¼% this year to just under 1% next year and about 2% in 2024. With growth below potential for several quarters, excess demand in the economy dissipates and the economy moves into excess supply in 2023. Putting the global and Canadian outlooks together, we expect inflation will hover around 7% in the final quarter of this year, fall to around 3% by the end of next year and return to the 2% target by the end of 2024. The Bank of Canada's job is to ensure inflation is low, stable and predictable. We are still far from that goal. We view the risks around our forecast for inflation to be reasonably balanced, but with inflation so far above our target, we are particularly concerned about the upside risks. We are mindful that adjusting to higher interest rates is difficult for many Canadians. Many households have significant debt loads, and higher interest rates add to their burden. We don't want this transition to be more difficult than it has to be. But we remain focused on our mandate. Higher interest rates in the short term will bring inflation down in the long term. And getting through this difficult phase will get us back to price stability with sustained growth. As we move forward, we will be watching carefully to assess the impact of higher rates on spending and how this is feeding through to price pressures. We will also be watching to see how global supply disruptions resolve and to what extent this translates into lower inflation in Canada. Finally, we'll be watching inflation expectations closely to assess how households and businesses are responding to slowing growth and spending. With that summary, Senior Deputy Governor Rogers and I are now pleased to take your questions. 3/3 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the Standing Senate Committee on Banking, Trade and the Economy, Ottawa, Ontario, 1 November 2022.
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Tiff Macklem: Opening statement - Standing Senate Committee on Banking, Trade and Economy Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, before the Standing Senate Committee on Banking, Trade and the Economy, Ottawa, Ontario, 1 November 2022. *** Good evening. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcement and the Bank of Canada's Monetary Policy Report (MPR). Last week, we raised the policy interest rate by 50 basis points to 3.75%. This is the sixth consecutive increase since March. Quantitative tightening continues and is complementing increases in the policy rate. We also expect our policy rate will need to rise further. How much further will depend on how monetary policy is working to slow demand, how supply challenges are resolving and how inflation and inflation expectations are responding to this tightening cycle. Our decision last week reflected several considerations. First, inflation in Canada remains high and broad-based, reflecting large increases in both goods and services prices. Inflation has come down in recent months, but we have yet to see a generalized decline in price pressures. About two-thirds of the components of the consumer price index (CPI) have risen by more than 5% over the last year. And rising prices for essentials like groceries and rent are hitting lower-income Canadians particularly hard. Second, and related, the economy is still in excess demand-it's overheated. Job vacancies have declined from their peak but remain high, and businesses continue to report widespread labour shortages. With the economy now fully reopened, households want to enjoy many of the close-contact services they have missed, but businesses can't keep up, and we have seen prices for services rise rapidly. Third, higher interest rates are beginning to weigh on growth. This is increasingly evident in interest-rate-sensitive parts of the economy, like housing and spending on big-ticket items. But the effects of higher rates will take time to spread through the economy. Fourth, there are no easy outs to restoring price stability. We need the economy to slow down to rebalance demand and supply and relieve price pressures. We expect growth will stall in the next few quarters-in other words, growth will be close to zero. But once we get through this slowdown, growth will pick up, our economy will grow solidly, and the benefits of low and predictable inflation will be restored. To put this in numbers, growth in gross domestic product (GDP) is projected to decline from about 3¼% this year to just under 1% next year and then rise to 2% in 2024. And 1/2 BIS - Central bankers' speeches inflation is expected to hover around 7% in the final quarter of this year, fall to around 3% by the end of next year and return to the 2% target by the end of 2024. Finally, we are trying to balance the risks of under- and over-tightening. If we don't do enough, Canadians will continue to endure the hardship of 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 the economy more than needed. And we know that has harmful consequences for people's ability to service their debts, for their jobs and for their businesses. This tightening phase will draw to a close. We are getting closer, but we are not there yet. The Bank of Canada's job is to ensure inflation is low, stable and predictable. We are still far from that goal. We view the risks around our forecast for inflation to be reasonably balanced. But with inflation so far above our target, we are particularly concerned about the upside risks. We are mindful that adjusting to higher interest rates is difficult for many Canadians. Many households have significant debt loads, and higher interest rates add to their burden. We don't want this transition to be more difficult than it has to be. But higher interest rates in the short term will bring inflation down in the long term. Canadians are looking for ways to protect themselves from rising prices, and we are working to protect them from entrenched inflation. It will take time to get back to solid growth with low inflation. But we will get there. By working through this difficult phase, we will get back to price stability with sustained economic growth, which benefits everyone. With that summary, Senior Deputy Governor Rogers and I are now pleased to take your questions. 2/2 BIS - Central bankers' speeches
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Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Public Policy Forum, Toronto, Ontario, 10 November 2022.
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Remarks by Tiff Macklem Governor of the Bank of Canada Public Policy Forum November 10, 2022 Toronto, Ontario Restoring labour market balance and price stability Introduction Good morning. It’s great to be back in Toronto to discuss an issue that matters to everyone—the Canadian labour market. I’m particularly pleased to be on a university campus for a speech that explores the future of workers and jobs. And I want to thank the Public Policy Forum for inviting me to engage with students, researchers and thought leaders on this important issue. My Governing Council colleagues and I meet with stakeholders of all kinds— business leaders and community groups, unions and students. And everywhere we go, we get many of the same questions. First, people ask about inflation and interest rates. Controlling inflation is our top priority, and I’ll get into that today. Everyone also wants to talk about jobs and the labour market, and three questions regularly come up: Why can’t businesses find enough workers? Are we going into a recession, and does that mean a big rise in the unemployment rate? And what is the Bank of Canada’s role in supporting maximum sustainable employment? So today I want to address these questions. I will tackle them in three parts. First, I want to outline how inflation and the labour market are linked. I’ll explain that returning to low and stable inflation is the best way to achieve maximum sustainable employment. Our mandate is explicit about that. Second, I want to highlight how the Canadian labour market was hit by COVID-19, how it recovered and what we expect in the coming months. Finally, I want to discuss structural changes in the labour market, such as the aging of the population, that we’d be grappling with even if the pandemic hadn’t happened. I will discuss what we are watching and what Canadian governments and businesses can do to help grow the supply of labour. I would like to thank Mikael Khan and Corinne Luu for their help in preparing this speech. Not for publication before November 10, 2022 11:55 am Eastern Time Our mandate Since the Bank was founded, its mandate has been to promote the economic and financial welfare of Canada. As we said when we renewed our monetary policy framework last December, the Government of Canada and the Bank believe that the best contribution monetary policy can make to the well-being of Canadians is to deliver price stability. This is formalized with an inflation target, which is the 2% midpoint of a 1% to 3% inflation-control range. The Government and the Bank also agree that monetary policy should continue to support maximum sustainable employment. We recognize that maximum sustainable employment is not directly measurable and is determined largely by non-monetary factors that can change through time. This reflects the reality that maximum sustainable employment is more of a concept than a number. In practice, knowing when we’ve reached it is difficult because we have to infer where it is, and labour market indicators give us clear signals only when we are well above or below it. Finally, well-anchored inflation expectations are critical to both price stability and maximum sustainable employment. That’s why the Government and the Bank agree that the primary objective of monetary policy is to maintain low, stable inflation over time.1 What I want to stress here is that maximum sustainable employment and inflation close to the 2% target go hand in hand. If employment is well below its maximum sustainable level, the economy is missing jobs and incomes, and spending will be below the economy’s productive capacity. This puts downward pressure on inflation, pushing it below the target. That’s what happened early in the pandemic. If the economy is operating above maximum sustainable employment, businesses won’t be able to find enough workers to keep up with demand, putting upward pressure on prices and pushing inflation above the target. That’s where we are today. At almost 7%, inflation is well above our 2% target. Inflation in Canada partly reflects global factors—sharply higher prices for many commodities and internationally traded goods. But much of the inflation we are experiencing reflects domestic factors—namely, excess demand in the Canadian economy. Our economy is overheated. Job vacancies are elevated, and businesses are reporting widespread labour shortages. Over the last six months, wage growth has increased and broadened across the economy. The unemployment rate in June hit a record low—and while that seems like a good thing, it is not sustainable. The tightness in the labour market is a symptom of the general imbalance between demand and supply that is fuelling inflation and hurting all Canadians. Since March, we have been raising our policy interest rate to help bring inflation back to our target. Higher interest rates will work to slow spending and labour 1 See “Joint Statement of the Government of Canada and the Bank of Canada on the Renewal of the Monetary Policy Framework” for more information. demand in the economy, and over time, this will relieve domestic inflationary pressures. We’re trying to balance the risks of over- and under-tightening monetary policy. If we don’t raise interest rates enough, Canadians will continue to endure high inflation, and high inflation will become entrenched, requiring much higher interest rates and a sharper slowing in the economy to restore price stability. If we raise interest rates too much, the economy will slow more than it needs to, unemployment will rise considerably, and inflation will undershoot our target. Getting the balance just right is no easy task, and I want to explain what we’ll be watching in the labour market as we make monetary policy decisions in the months ahead. That starts with a look at the upheaval of the pandemic and what Canadian workers have been through over the last two and a half years. Deep recession, rapid recovery and excess demand The recent history of the labour market can be broken into three distinct phases: pandemic-related economic shutdowns, the recovery that came with re-opening, and the current environment of excess demand. Let me address each of these in turn. The pandemic shock The COVID-19 pandemic caused the biggest global downturn since the Great Depression. Much of the economy shut down to contain the spread of the virus, and millions of people lost their jobs. In Canada, we plunged into the deepest recession on record, and the effects were devastating. Roughly 3 million people who were employed before the pandemic were out of work by April 2020. And another 2.5 million were working less than half of their usual hours. The shock hit workplaces from coast to coast to coast. But it hit very unequally. Work that required close contact with people—mainly in the services sector—was shut down. That disproportionately affected youth, women and low-wage workers. The closure of schools and daycares also hit women with young children harder, and they experienced a greater decline in their hours worked. Never before has so much of the economy been shut down so suddenly and for so long. We were very concerned that it would result in scarring. In other words, we worried that damage to the incomes and careers of a whole segment of the population, particularly women, youth and immigrants, would be permanent. The recovery That brings me to the second phase: the fastest recovery ever. Do you remember that first year of the pandemic? We couldn’t travel abroad or even much within Canada, so we stayed home. We renovated our homes to accommodate working and studying remotely, and we bought many goods to replace the fun we’d normally get from the services sector. Just four months after the employment lows of April, nearly two-thirds of the job losses were recouped (Chart 1). What was behind the rapid bounce back? It was largely because the recession came from an unprecedented event—the pandemic—and not from imbalances or structural problems in the economy. That meant that when the economy reopened, employment could be restored quickly. We expected a rapid rebound in employment with reopening, but we were concerned that too many people would be left behind. Fortunately, the scarring we were worried about wasn’t as pervasive as we had feared because employment recovered quickly. Chart 1: Employment has recovered quickly Level of employment, monthly data, index: the month of peak employment immediately before each recession = 100 Index COVID-19 recession Months 1981–82 recession 1990–92 recession 2008–09 recession Note: Data for the COVID-19 recession are available for 32 months. Sources: Statistics Canada and Bank of Canada calculations Last observation: October 2022 The synchronous policy response of governments and central banks around the world played a big role in supporting the recovery. In Canada, fiscal policies were designed to help keep workers attached to their employers and businesses afloat even with little money coming in.2 That limited damage to the labour market. Monetary policy actions complemented these fiscal policies. We cut policy interest rates and introduced quantitative easing to reduce borrowing costs, which supported spending and helped restore employment. The reopening of schools and daycares helped too. As schools returned to inclass teaching, mothers went back to work. This reduced the uneven impact of the pandemic, but it did not eliminate it.3 As the vaccination rate increased and the economy reopened, those employed in goods-producing industries returned to work sooner than those engaged in hard- 2 For example, the Canada Emergency Wage Subsidy kept employees attached to their existing jobs, supplementing the wages of 5.3 million workers at its peak. 3 See T. Macklem, “Economic progress report: A very uneven recovery” (speech delivered virtually to the Canadian Chamber of Commerce, Ottawa, Ontario, September 10, 2020). to-distance services.4 And sectors where remote work is effective—such as professional services, public administration and finance, and insurance and real estate—experienced employment well above their pre-pandemic levels, while employment in services sectors such as hotels and restaurants remained much below. Overall, this rapid pace of the recovery is unheard of, far faster than in past recessions. Excess demand That brings me to 2022 and our current labour market. We are in excess demand, where the economy’s need for labour is outpacing its ability to supply it. At the end of last year, it was not obvious that the labour market would rapidly overheat in 2022. The Omicron variant was spreading, and COVID-19 case numbers were once again rising. But looking through the volatility in the labour market caused by waves of the pandemic, we can now see a clear trend of an increasingly tight labour market in 2022. Employment growth remained strong, reports of labour shortages increased, and wage growth picked up. To meet rising demand, employers reached more deeply into the labour market, and they found some new workers. Hiring of immigrants—especially recent immigrants—increased, easing employment gaps between these workers and Canadian-born prime-age workers.5 Pandemic innovation and strong labour markets also brought more flexibility to some jobs, partly due to digitalization accelerated by the pandemic. Employers could more easily accommodate workers in remote locations or those who needed flexible hours. Long-term unemployment, which rose sharply during the pandemic, returned to its prepandemic levels. We began raising our policy interest rate in March to cool this overheated economy, but the momentum in the labour market held. Employment gains continued, and labour shortages intensified through the spring. The unemployment rate reached a record low 4.9% in June. Job vacancies exceeded one million in the second quarter—a new record. Rising vacancies with low unemployment were clear signs that the economy was out of balance, with demand running ahead of supply. In recent months, we’ve seen initial signs that these exceptionally tight labour market conditions have started to ease. Since the spring, employment has levelled off, and the unemployment rate has crept up a little, to 5.2%. Wage growth has risen but now looks to be plateauing. Job vacancies have started to 4 This reflected the fact that hard-to-distance services faced subsequent waves of public health restrictions that did not affect the goods sector. See L. Schembri, “Labour market uncertainties and monetary policy” (speech delivered to the Canadian Association of Business Economics, Toronto, Ontario, November 16, 2021). 5 The employment rate for recent prime-age immigrants has increased by 6.7 percentage points relative to before the pandemic. decline. Their softening has been evident in sectors that are more sensitive to interest rates, such as manufacturing and construction (Chart 2). Chart 2: Job postings have eased, and employment growth is weaker in interest-ratesensitive sectors a. Percentage change in job postings relative to 2018 % b. Employment change from July 2022 to October 2022 Not sensitive Moderately sensitive Sensitive -20 -40 Total -60 Sources: Indeed, Statistics Canada and Bank of Canada calculations Last observations: Indeed, October 28, 2022; Labour Force Survey, October 2022 Looking ahead to balance As we look ahead, there are two elements to achieving a better-balanced labour market: demand and supply. Demand for labour needs to moderate so supply can catch up. And the more the labour supply grows over time, the less slowing is needed in labour demand to restore and maintain price stability. Labour demand The first part—slowing demand—is what we influence with interest rate increases. Generally, low unemployment and high demand for workers benefit Canada’s economy. Good jobs are the best way to reduce inequality and ensure that Canadians have the income they need to meet the needs of their families. But right now, we need the economy to slow down. With more modest spending growth, the demand for labour by businesses will ease, vacancies will decline, and the labour market will come into better balance. This will relieve price pressures. Increasingly, we hear concerns that Europe, the United States and even Canada are heading for a recession. In our Business Outlook Survey released a few weeks ago, a majority of Canadian firms surveyed said a recession is likely in the next 12 months. As we said in our October Monetary Policy Report, we expect growth to stall in the next few quarters—in other words, growth will be close to zero. That means two or three quarters of slightly negative growth are just as likely as two or three quarters of slightly positive growth. That’s not a severe recession, but it is a significant slowing of the economy. Slower economic growth will likely lead to higher unemployment. We know that job losses have a human cost. But because the labour market is so hot and we have an exceptionally high number of vacant jobs, there is scope to cool the labour market without causing the kind of large surge in unemployment that we have typically experienced in recessions. As we use higher interest rates to cool inflation, we’ll be watching very closely for signs that the economy and the labour market are responding. One way to explore the needed adjustment in our labour market is through the lens of what economists call the Beveridge curve. This curve depicts the typically inverse relationship between job vacancies and unemployment (Chart 3). Chart 3: Cooling labour demand is associated with some increase in unemployment Quarterly, seasonally adjusted, dotted line denotes evolution over time Vacancy rate (% of labour force) 2022Q3 Unemployment rate (%) Fitted curve (2011–19 sample) Observed values Note: Job vacancies for 2022Q3 are based on the average of July and August from the Job Vacancy and Wage Survey. The curve is based on data from 2011–19. Sources: Indeed, Canadian Federation of Independent Business, Statistics Canada and Bank of Canada Last observation: 2022Q3 calculations As job vacancies decline, unemployment usually goes up. But by how much? That depends on where the labour market is along the curve. Generally speaking, when job vacancies are high, as they are now, a decline in vacancies does not lead to as big an increase in unemployment as it does when job vacancies are low to begin with. Staff analysis of Canada’s Beveridge curve suggests that the unemployment rate will rise somewhat if the job vacancy rate returns to more normal levels.6 But it would not be high unemployment by historical standards. 6 The Beveridge curve shifted out at the onset of the pandemic, suggesting a higher unemployment rate for any given level of job vacancies. However, Chart 3 shows that this shift So what does that mean for Canadian workers? Well, it’s clear that the adjustment is not painless. Lower vacancies mean it could take longer to find a job, and some businesses will find that with less demand for their products, they don’t have enough work for all their workers. But relieving the pressure in the labour market will contribute to restoring price stability. We’ll be watching a broad set of indicators to gauge the health of the labour market and how it is adjusting to tighter monetary policy. As we watch to see how the economy is responding to higher interest rates, we expect that some parts of the economy will be more sensitive to higher borrowing costs and will slow earlier or more sharply. The response will be somewhat uneven. Some industries more than others will see fewer vacancies or even job losses. We’ll be looking beyond headline employment numbers to gauge how different groups in the labour market are adjusting. Last year, we launched our new dashboard of indicators to help us assess the overall health of the labour market and where we are relative to maximum sustainable employment.7 (See the Appendix). Labour supply That brings me to the second component of getting back to balance: labour supply. The labour market is also being—and will continue to be—profoundly affected by supply-side developments that are beyond the scope of monetary policy. That brings us back to one of the frequently asked questions: “Where are all the workers?” The short answer is most of them are working and some have retired. We now have half a million more people employed than we did before COVID-19 hit. But an increase in retirements and less immigration early in the pandemic have reduced labour force growth. That’s another reason the labour market is so tight. These demographic shifts have played a big role in the supply of labour. In Canada, as in many advanced economies, the age group that grew the fastest in recent years was those aged 65 and over. That’s not pandemic-related, it’s simply the aging of the baby boomers. Those over 65 tend to have the lowest labour force participation rate, and that has been pulling down the growth of Canada’s labour force in recent years.8 Immigration has typically helped Canada’s labour force grow. But the pandemic disrupted immigration flows. Borders closed, and Canada fell short of its 2020 immigration target by about 156,000 people, or an estimated 100,000 workers. Fortunately, immigration is bouncing back as border restrictions return to normal. Canada met its immigration target of 401,000 in 2021. And, based on the has largely reversed. For more details, see A. Lam, “Canada’s Beveridge curve and the outlook for the labour market,” Bank of Canada Staff Analytical Note (forthcoming). 7 See T. Macklem, “Our monetary policy framework: Continuity, clarity and commitment” (speech delivered virtually to the Empire Club of Canada, Toronto, Ontario, December 15, 2021). 8 Health concerns related to the pandemic may have interrupted the longer-run trend of a higher participation rate of older workers. Recently, the pace of retirement has normalized following lower rates earlier in the pandemic. increase in the immigration targets since then, the shortfall in permanent residents caused by the pandemic should be recouped in 2023.9 Many advanced economies whose populations are aging are looking to increased immigration to meet the needs of their labour markets. But because of relatively higher immigration targets, Canada will have an advantage in coming years—Canada’s population growth is expected to far exceed that of other G7 countries (Chart 4).10 Chart 4: Canada has the highest projected population growth in the G7 Annual population growth, average 2022–32 % 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 Japan Italy Germany France United Kingdom Sources: UN population projections via Haver Analytics and Bank of Canada calculations United States Canada Last data plotted: 2032 This is a key reason why the growth outlook in our October Monetary Policy Report exceeds that of some of our peers, including the United States. The strong immigration targets suggest that net immigration will account for over twothirds of the expected growth in Canada’s potential output. The strength of the labour market has helped improve outcomes for recent immigrants. We can also increase participation by other workers, including women, if we leverage the changes that these tight labour markets have brought. We can further reduce the long-standing gap between prime working-age women and men. The pandemic showed us how important child care is—when it disappeared, so did many female workers. Canada’s female participation rate is higher than that of the United States. But other countries have higher female 9 Net immigration flows surged by about 270,000 in the second quarter of 2022, by far the highest single quarter increase on record. The government has targeted an increase of 1.4 million permanent residents from 2022 to 2024. 10 These forecasts for Canada’s population growth rates exclude the recent increase in immigration targets, which should further boost growth. See Immigration, Refugees and Citizenship Canada, “An Immigration Plan to Grow the Economy” (November 1, 2022). - 10 - participation than we do—we’re only just above the median of member countries of the Organisation for Economic Co-operation and Development for participation of women aged 25 to 54, ranking 16th out of 38 in 2021. Improvements to universal child care may narrow these differences, though the full effects will take time. Other populations may also benefit from improved labour market access, including Indigenous people, who have a younger and faster-growing population than many other groups. Potential for remote work, as well as training to develop skills in areas with critical labour shortages, may open new opportunities for groups facing local labour market challenges. And companies need to do their part to attract and retain new segments of the labour force. By adjusting to and taking advantage of structural changes in the labour market, Canada can increase the sustainable growth rate of our economy. An aging population reduces the participation rate, and higher immigration is becoming increasingly important for Canada’s potential growth. Changes brought by globalization and technological change, especially digitalization, will also continue to affect labour demand and the skills employers need. The net effect on maximum sustainable employment is something we will be working to assess. An increased supply of workers raises the rate the economy can grow without generating inflationary pressures. But enhancing supply takes time. It also creates new demand. New workers will have new incomes, and that will add to spending in the economy. That’s why increasing supply, while valuable, is not a substitute for using monetary policy to moderate demand and bring demand and supply into balance. Conclusion It’s time for me to conclude. Since the onset of COVID-19, the labour market has been in tremendous turmoil. The pandemic caused a surge in unemployment and had a terribly uneven impact, exacerbating the inequality already faced by women, youth and marginalized workers. We were very concerned about widespread job losses, deep cuts in consumer spending and, ultimately, deflation. But the recovery was swift and across the board, with the fastest rebound in employment ever. Now the economy has gone too far in the other direction. The economy is in excess demand, the job market is too tight, and inflation is too high. Monetary policy has begun to have an impact, but it will take time for the effects of higher interest rates to spread through the economy and reduce demand and inflation. Once we get through the slowdown, growth will pick up and our economy can grow solidly again with healthy employment and low inflation. How much employment growth we can achieve while maintaining low inflation will depend on the growth of labour supply. This is the fundamental concept that maximum sustainable employment captures. It is not maximum employment—it’s how much employment the economy can sustain while maintaining price stability. As I said earlier, you can’t have one without the other. - 11 - Growing maximum sustainable employment is a shared responsibility of government, businesses and workers. Increased immigration adds potential workers, and governments need to ensure newcomers have a smooth path into the workforce, with credential recognition and settlement support like language and skills training. Businesses need to invest in training so we can reduce the skills mismatch. And workers need to invest in gaining the skills the new economy needs. Our priority at the Bank of Canada is to restore price stability. The overriding imperative is to ensure that high inflation does not become entrenched because, if that happens, nothing works well. This was the experience of the 1970s.11 The failure to control inflation resulted in high inflation and high unemployment. Labour strife increased as workers tried to cope with large increases in the cost of living. And ultimately it took much higher interest rates, and a severe recession with a large increase in unemployment, to rein in inflation and re-anchor inflation expectations. That is exactly what everyone wants to avoid. That’s why we have front-loaded our interest rate increases. And that’s why we are resolute in our commitment to return inflation to the 2% target. To get there, we need to rebalance the labour market. This will be a difficult adjustment. We want to do this in the best way possible for Canadian workers and businesses. Higher interest rates will help cool spending and the demand for labour in the economy. This will give supply time to catch up, relieving price pressures. We will be monitoring a wide range of indicators to assess this rebalancing and Canada’s sustainable growth rate. Canada has some advantages that will help support our labour supply, creating more capacity for growth. The best contribution monetary policy can make to a healthy labour market is to deliver price stability. With inflation and inflation expectations well anchored on the 2% target, our economy, our workers and our businesses will be positioned for growth and prosperity. Thank you. 11 See T. Macklem, “A Measure of Work” (speech to the Winnipeg Chamber of Commerce, Winnipeg, Manitoba, October 4, 2012). - 12 - Appendix The first chart shows the depth of the weakness in the labour market at the beginning of the pandemic. The red circle is where these indicators were before the pandemic. As you can see, in April 2020, almost every indicator was way below pre-pandemic levels. In the second chart, we see that many indicators are now well above pre-pandemic levels, which provides a clear indication that the labour market is overheated. Chart A-1: Summary of labour market measures through time Note: This chart illustrates how much labour market health has recovered across select labour market indicators. A full bar implies that the measure has fully recovered, while a bar on the centre ring implies the measure is at its crisis trough. LFS is Labour Force Survey; BOS is Business Outlook Survey; JVWS is Job Vacancy and Wage Survey. For a full list of indicators see E. Ens, C. Luu, K. G. See and S. L. Wee, “Benchmarks for assessing labour market health,” Bank of Canada Staff Analytical Note No. 2022-2 (April 2022). Sources: Statistics Canada, Bank of Canada and Bank of Canada calculations Last observations: LFS, October 2022; BOS, 2022Q3; JVWS, 2022Q2; National accounts, 2022Q2
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Opening remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Conference on Diversity, Equity and Inclusion in Economics, Finance and Central Banking, Ottawa, Ontario, 14 November 2022.
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Tiff Macklem: Opening remarks - Conference on Diversity, Equity and Inclusion in Economics, Finance and Central Banking Opening remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Conference on Diversity, Equity and Inclusion in Economics, Finance and Central Banking, Ottawa, Ontario, 14 November 2022. *** Good morning. I'm pleased to be with you-virtually at least-to welcome you to the fourth conference on Diversity, Equity and Inclusion in Economics, Finance and Central Banking. I'm grateful that what began in 2018 between the Bank of England, the European Central Bank and the US Federal Reserve has grown to include the Bank of Canada. It is our great honour to be hosting this year. Research and experience have already settled the question of whether diversity and inclusion bring benefits. We know they do. Diverse and inclusive groups make better decisions. That's because they can avoid the groupthink that happens when decision makers all have similar backgrounds and approach problems in the same way. If you bring diverse perspectives and experiences to a problem, you get better solutions, more creativity and higher productivity. Companies that harness these benefits give themselves a clear competitive advantage. But understanding that diversity and inclusion bring benefits isn't enough. We gather here to work together on how to make economics, finance and our own institutions more diverse and inclusive. When I spoke to you a year ago, I said in my closing remarks that we need to be better listeners and more inclusive and relatable communicators. And we need to better understand how our policy tools affect different groups of people in the economy. What a year it has been to put all those goals to the test. Inflation is too high around the world, and rapid increases in interest rates are raising the costs of servicing debt. At the Bank of Canada, our listening and communication skills are running at full tilt as we hear from households and businesses and explain our decisions. We are hearing from Canadians about how high inflation and tighter financial conditions are affecting their daily decisions and their lives. And we are working hard to earn their trust and provide clarity on the path back to price stability. High inflation affects everyone, but lower-income households feel the burden of high inflation the most. Lower-income households spend a greater portion of their income on necessities. They have smaller financial cushions. And they may be less able to switch to lower-priced alternatives because they are already there. Lower-income Canadians will also be disproportionately affected by the slowdown in economic activity that is needed to rebalance demand and supply in the economy and relieve price pressures. Unfortunately, there is no easy out to restoring price stability. But once we rebalance demand and supply, growth will pick up, our economy will grow solidly, and the benefits of low and predictable inflation will be restored. That's good for all Canadians, and it's imperative for our shared prosperity. 1/5 BIS - Central bankers' speeches We are communicating through every channel we have to explain how our monetary policy-primarily higher interest rates-is being deployed to bring inflation back to target. Understanding how our policy tools affect equality in the economy is more important than ever, given high inflation and slowing growth. I know that today and tomorrow we'll spend some time here looking ahead to how we can improve diversity and inclusion in the economy, in finance and within central banking. Before we do, I'd like to take some time to look back at the impact of the COVID-19 pandemic on labour market equality-it is a remarkable story. I know the pandemic hit all of us at the same time, and we have many shared experiences. But I will focus on Canada because that's what I know best. The massive upheaval in the labour market and in economic activity that came with the repeated closures of the economy had a disproportionate effect on some of our more vulnerable workers. And at the Bank we were very worried about the longer-term fallout on the careers of new entrants into the labour market, women and racialized Canadians. The exceptionally rapid recovery has relieved much of our concern about longer-term scarring, but the sharp bounce back in demand, with supply still impaired, has resulted in a new challenge-inflation and its harmful and uneven impacts. Let me expand. Recession and recovery COVID-19 caused the biggest global downturn since the Great Depression. Much of the economy shut down to contain the spread of the virus, and millions of people lost their jobs. Canada dove into the deepest recession on record, and the impacts were devastating. Roughly three million people who were employed before the pandemic were out of work by April 2020. About 2.5 million more were working less than half their usual hours. The shock hit workplaces from coast to coast to coast. But it did not hit everyone equally. Jobs that required close contact with people-mainly in the services sector-were shut down. That disproportionately affected youth, women and low-wage workers. The closure of schools and daycare centres also hit women harder, and they experienced a larger decline in both hours worked and their participation rate. Never before has so much of the economy been shut down, so suddenly and for so long. But thanks to new vaccines and exceptional fiscal and monetary policies, the recovery was the fastest ever. By August, four months after the employment lows of April, nearly two-thirds of Canadian job losses were recouped. But with repeated waves of the virus hitting the economy, it took more than another year for employment to get back to its pre-pandemic level. Still, that pace of recovery is unheard of, far faster than in past recessions. What was behind the rapid recovery? Part of it was because the recession came from an unprecedented event-the pandemic-driven shutdown of large parts of the economyand not from imbalances or structural problems in the economy. That meant that when the economy reopened, employment could be restored quickly. We expected a rapid rebound in employment with reopening, but we were concerned too many people would 2/5 BIS - Central bankers' speeches be left behind. We are still learning about the longer-term effects of the pandemic, but the scarring we were worried about wasn't as pervasive as we had feared. Economic growth came roaring back quickly, and workers did not remain on the sidelines for long. The coordinated policy response of governments and central banks around the world played an important role in supporting the recovery. In Canada, fiscal policies were designed to help keep workers attached to their employers and businesses afloat even with little money coming in. That limited damage to the labour market. Our monetary policy actions complemented these fiscal policies. We cut policy interest rates and introduced quantitative easing to reduce borrowing costs. This supported spending and demand and helped restore employment. The reopening of schools and child care centres was as essential for parents as it was for children. As schools returned to in-class teaching, mothers came back to work, and the labour market participation of women bounced back to where it was before COVID19 hit. By October 2021, Canadian employment was above its pre-pandemic level, but the recovery was still uneven. Sectors such as professional services, public administration and finance, insurance and real estate were experiencing employment well above their pre-pandemic levels, while sectors such as hotels and restaurants remained much below. With the economy now fully reopened, these differences across sectors have eased. Indeed, with households wanting to enjoy many of the close-contact services they missed, businesses have had a hard time hiring enough workers to produce all the goods and services Canadians want to buy. Job vacancies are elevated, and firms report widespread labour shortages. This is symptomatic of an economy that is overheated. Businesses can't keep up with demand, and this is driving prices higher. To restore price stability, we need to rebalance demand and supply in the labour market to relieve price pressures. Monetary policy affects demand. By raising interest rates, we are moderating spending, and that will reduce the demand for workers. Invariably, this has unequal consequences across sectors and across workers. The other way to rebalance supply and demand is to increase the supply of workers. That takes time, and with inflation already far too high and with elevated risks that high inflation becomes entrenched, increasing labour supply is not an alternative to slowing demand. But it is a complement. And the more we can do on supply, the less we will need to do on demand. The pandemic showed us how important child care is-when it disappeared, so did many female workers. Our female participation rate recovered faster and is higher than that in the United States. But other countries do this better than Canada. We're just above the median of countries in the Organisation for Economic Co-operation and Development in terms of participation of women aged 25 to 54-Canada ranked 16th out of 38 in 2021. Recent improvements in universal child care may continue to narrow these differences, though the full effects will take time. 3/5 BIS - Central bankers' speeches Other populations may also benefit from improved labour market access, including Indigenous Canadians, who have a younger and faster-growing population than many other groups. Potential for remote work, as well as training to develop skills in areas of critical labour shortages, may open new opportunities for groups facing local labour market challenges. And companies need to do their part to attract and retain new segments of the labour force. Conclusion The pandemic has had a terribly uneven impact on the labour market, exacerbating the inequality already faced by women, youth and other marginalized workers. But the recovery has been swift and across the board, reducing-though not eliminating-the structural inequalities. Challenges remain as we seek to restore the balance of demand and supply and bring inflation back to target. Slowing economic growth will disproportionately affect our most vulnerable households. High inflation and high interest rates to combat inflation put an additional burden on our lowest-income households. I want to close out my opening remarks where I started. Our commitment to shared prosperity in the economy starts with our commitment to equity, diversity and inclusion in our organizations. We need a diverse and inclusive workforce at the Bank of Canada to take better decisions. We need a work environment where people feel they can bring their whole selves to work so that they can do their best work. And to sustain the trust of Canadians, we need to reflect the diversity of the Canadians we serve. As part of the broader economics and finance community, we also have a role to play in fostering diversity and inclusion in this community. And there are issues to confront in our own field. Economics is having its own #MeToo reckoning. Rather than ignore it, or evade it, I want to address it because it's important. So let me be clear. Harassment of any kind can never be ignored, or excused, or brushed away. It goes against everything we stand for at the Bank of Canada, and everything I stand for as an economist who has spent my career working with women who do amazing research, make impressive policy and dedicate their lives to this field we share. They pursue their career, as we all do, but they do so while facing harassment that I have never had to face. I cannot speak for the entirety of economics or even of central banking, but I can speak for the Bank of Canada. We've built up trust-with Canadians and with each other-and nothing would destroy that trust more quickly than if we stopped treating each other with respect. We have encouraged staff to report harassment when they see it. We want leaders to bring it forward when they hear about it. We can't be so self-assured as to think that harassment can't happen here. But I am confident that if it is happening, it won't be ignored. There's nothing more important to me as Governor than making sure that our outstanding staff at the Bank of Canada have an exceptional work environment where they can all be the very best they can be. 4/5 BIS - Central bankers' speeches I want the same for all of central banking, and for economics and finance as a whole. That is an important reason we are all gathered here for two days in partnership, to share, to learn, to reflect and to build on the actions we have taken to enhance equity, diversity and inclusion. I look forward to our work here today-and in the year ahead-as we work together to find better ways forward in this challenging time. Let the discussion begin. Thank you. 5/5 BIS - Central bankers' speeches
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Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, to Young Canadians in Finance, Ottawa, Ontario, 22 November 2022.
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Carolyn Rogers: Financial stability in times of uncertainty Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, to Young Canadians in Finance, Ottawa, Ontario, 22 November 2022. *** Introduction Good afternoon and thank you to Young Canadians in Finance for inviting me to be here today. It's great to see so many people here in the room and a warm welcome to those of you connecting virtually, from other chapters across Canada. No matter where you're joining us from, I'm sure you've all been hearing a lot about the Bank of Canada in recent months. Central banks around the world have been making headlines by rapidly increasing interest rates to get inflation under control. High inflation is something we haven't seen in Canada in more than three decades, which means many in this room are experiencing it-and the stress that comes with it-for the first time. It's undoubtedly frustrating to face the uncertainty of inflation and the impact of higher interest rates at a point in time when you are just getting financially established-building your career, buying a house, starting a family. And as members of this organization, many of you may also be dealing with the broader impacts of tightening fiscal and monetary policy on financial markets as part of your day job. So, I am particularly glad to have the chance to meet with you today to talk about the Bank's update on financial system stability. What I plan to do is give you a very high-level overview of why and how we monitor financial system stability at the Bank of Canada. I'll then touch on some of the global trends we're seeing that are affecting financial stability around the world and here at home. And finally, I will take a bit of a deeper dive into an area of financial stability that is currently on the minds of many Canadians-housing. I'm aiming to keep my opening remarks short-about 10 minutes-to leave plenty of time for your questions. The importance of a strong financial system Most central banks, including the Bank of Canada, have as part of their mandate the responsibility to monitor the soundness and stability of their country's financial system. Financial system stability, like price stability, is crucial to the health of our economy. Low, stable and predictable inflation contributes to sustained economic growth and prosperity. And a strong financial system-with solid institutions, robust payment systems and efficient markets-helps preserve savings, channel investment and facilitate payments. A weak financial system, on the other hand, can amplify or spread shocks throughout the system. And just as periods of uncertainty can test price stability, they can also test financial stability. 1/6 BIS - Central bankers' speeches The Bank's approach to monitoring financial stability takes a broad view. Canada's financial system is made up of a complex network of institutions, including banks and credit unions, pension funds and other asset managers. And many of our largest institutions operate globally.1 We monitor the financial system for risks and vulnerabilities. Vulnerabilities are weaknesses that often build over time and can make the system more susceptible to stress. They exist in almost any system. And, on their own, they may not lead to financial stress or instability. For that to occur you generally need a trigger-an event, or shock-whose impact can be amplified by the presence of vulnerabilities. It's the combination of these two things that can lead to periods of financial instability or, in extreme cases, a financial crisis. We use the information we gather in our monitoring to conduct research, inform policy decisions and communicate with Canadians. We publish a report each spring and give an update each fall-both of which talk about global and domestic conditions and the state of the Canadian financial system through the lens of the risks and vulnerabilities I just spoke of. And I am pleased to announce that today we launched an interactive dashboard of financial vulnerability indicators on our website.2 We're sharing information on what we monitor to help people better understand the vulnerabilities we all face. The uncertain world we live in So, let's turn to an update on global financial conditions and the environment we're in today. It's an understatement to say that the past few years have seen major global economic changes and financial system developments. First, we are emerging from two years of a global pandemic and the resulting health and economic impacts. Less than a year has passed since Canada's economy fully reopened, and parts of the world-China, most notably-are still enduring lockdowns. This has had a dramatic and enduring effect on both supply and demand. As a result, inflation has risen in most countries around the world. In response, central banks have shifted rapidly to tighten monetary policy to bring inflation down. As interest rates rise, financial conditions are tightening, liquidity is scarcer, and risk assets are repricing. Second, geopolitical tensions have increased, primarily because of Russia's invasion of Ukraine. This has created a lot of volatility and uncertainty in global commodity markets, especially energy. And third, we have a legacy of debt coming out of the COVID-19 crisis. Governments around the world took extraordinary measures to support people and businesses through economic shutdowns. Businesses-particularly in hard-to-distance sectors-have endured a difficult few years, and some took on additional debt to get through them. 2/6 BIS - Central bankers' speeches And while some individuals and households were able to accumulate extra savings over the pandemic, others took on additional debt. These three forces-inflation, volatility in commodity and financial markets, and increased levels of debt-are not unique to Canada. Most countries around the world are facing these same challenges right now. But the impact on each country will depend, at least in part, on the resilience of that country's financial system-which in turn depends on those pre-existing vulnerabilities I just described. And given how interconnected the global financial system has become, and the fact that Canada is a medium-sized, open economy, the impact here at home will also depend on how other countries weather the storm. Housing and financial stability Let's now take a closer look at two vulnerabilities we're watching closely- household debt and housing-and their relationship to financial stability. Housing is certainly top of mind for many Canadians these days. If you were to dig up the Bank of Canada's reports on financial system stability that I just mentioned, you would find analyses dating as far back as 2006 on escalating housing prices and increasing household debt. In other words, these two vulnerabilities have existed in Canada's financial system for a long time. The buildup of these vulnerabilities continued after the global financial crisis in 2008 and 2009. Canada's financial system sailed through that shock relatively smoothly, and our economy recovered more quickly than most. A decade of low interest rates, a growing population and constrained housing supply all combined to feed a steady march upward in house prices. Higher house prices meant Canadians were taking on more debt to buy homes. And as prices continued to rise quickly, some Canadians saw housing as an investment opportunity as well as a source of shelter and took on additional debt to invest in housing. Well before the arrival of COVID-19 Canadians were worried about the cost of housing becoming detached from incomes-particularly for first-time homebuyers. And they were worried about investors contributing to rapid increases in house prices, particularly in large urban markets. Then the pandemic hit and our housing market shifted up another gear, and not just in places like Toronto and Vancouver. We were all spending more time at home, and people in cities wanted more space, which put pressure on housing demand in smaller cities and towns.3 Low interest rates that supported the economy through the pandemic also helped fuel high house prices by reducing carrying costs. Over the course of less than two years house prices went up by more than 50% in most markets. And housing activity-the number of houses being bought and sold-was about 30% higher than prepandemic levels. 3/6 BIS - Central bankers' speeches This spring, as we emerged from pandemic restrictions and monetary policy began to tighten rapidly in response to high inflation, the housing market started to react. This was to be expected. The level of price increases and sales activity were both unsustainably high. And because most people borrow to buy a house, housing is one area of the economy that is the fastest to react to tighter monetary policy. This tightening cycle, though, has been particularly steep. We have moved interest rates up quickly because history tells us that front-loading rate increases gives us the best chance to cool the economy quickly and keep inflation expectations anchored. This avoids the prospect of larger increases down the road. Higher interest rates are starting to work to slow the economy and tame inflation. We have a long way to go to get inflation back to target, but there are some early signs that monetary policy is working. Unfortunately, this adjustment is not without some pain. We recognize that. What this means for Canadians One group of Canadians who will be finding this adjustment painful are those who recently purchased a home, potentially stretching their budget to do so, and who chose a variable-rate mortgage. This is not a large share of households, but it is larger than it would have been based on historical trends. This is because more Canadians opted for a variable-rate mortgage over the last year than have in the past, at a time when housing prices were high.4 Borrowers with a variable-rate mortgage will already have seen a significant increase in their monthly payments if their payments are also variable. Borrowers with a variablerate mortgage and fixed payments may face higher payments if they hit their "trigger rate"-the rate at which their monthly mortgage payment is covering only the interest and not paying down the principal. The Bank has done some work to estimate the share of households that have reached their trigger rates, which is available on our website.5 Homeowners with fixed-rate mortgages may also be looking at higher payments when they renew, depending on when they took out their mortgage and whether they have room to extend their amortization period. The bottom line is that mortgage costs for some Canadians have already increased, and they will likely increase for others in time, making home ownership more expensive. In addition, house prices are also coming down-albeit modestly so far-relative to their recent increase. We need lower house prices to restore balance to Canada's housing market and make home ownership more affordable for more Canadians. But lower house prices may add stress for those people who purchased recently. They will have reduced equity, and this may limit their options to refinance. So back to our framework to monitor financial stability. Canada's economy has longstanding vulnerabilities in the form of escalating house prices and elevated levels of 4/6 BIS - Central bankers' speeches household debt that were further exacerbated during the pandemic. And the risk of a trigger that may affect financial stability has increased, as a result of high inflation and the response of increasing interest rates. But there are good reasons to believe that the system as a whole will be able to weather this period of stress and remain resilient. Since the 2008–09 global financial crisis, countries around the world have put in place a series of reforms-including higher capital and liquidity levels at banks-to shore up financial system resilience and protect against future shocks. Here at home, these measures also included a borrower-level mortgage stress test to ensure Canadians could continue to afford their homes when interest rates rose. And, importantly, we are not expecting a severe economic downturn with the kind of large job losses typical of past recessions. This is not to minimize the very real hardship that some are feeling. Higher mortgage payments are difficult to handle for many people-and all the more so when other costs are also going up. Looking ahead In this environment, the Bank of Canada is making two important contributions. First, we will continue to monitor the impacts of higher interest rates on Canadians and on financial system stability. Second, we will get inflation back to target. We know higher interest rates are difficult for many Canadians-particularly young Canadians-many of whom are recent homebuyers and are therefore carrying higher debt loads. We don't want this transition to be more difficult than it has to be. But higher interest rates in the short term will bring inflation down in the long term. Canadians are looking for ways to protect themselves from rising prices, and we are working to protect them from entrenched inflation. It will take time to get back to solid growth with low inflation, but we will get there. By working through this difficult phase, we will get back to price stability with sustained economic growth, which benefits everyone. Thank you for your attention, and I look forward to your questions. I would like to thank Stephen Murchison and Louis Morel for their help in preparing this speech. 1 Financial Stability Board, "2021 List of Global Systemically Important Banks (G-SIBs)" (November 23, 2021).[] 2 Bank of Canada, "Tracking the financial vulnerabilities of households and the housing market."[] 5/6 BIS - Central bankers' speeches 3 See L. Morel, "Analyzing the house price boom in the suburbs of Canada's major cities during the pandemic," Bank of Canada Staff Analytical Note No. 2022-7 (June 2022).[] 4 Regulatory filings of Canadian banks show that, since the onset of the pandemic, about 670,000 mortgages for home purchases were originated with a variable rate. Both the volume of new mortgages and the share of new mortgages with a variable rate have risen. Variable-rate mortgages have represented around 50% of new lending since mid-2021, up from an average of 20% in the five years before the pandemic. For more information, see "Funds advanced and outstanding balances for new and existing lending by chartered banks" on the Bank of Canada's website.[] 5 See S. Murchison and M. teNyenhuis, "Variable-rate mortgages with fixed payments: Examining trigger rates," Bank of Canada Staff Analytical Note No. 2022-19 (November 2022).[] 6/6 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 23 November 2022.
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Tiff Macklem: Opening statement before the House of Commons Standing Committee on Finance Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 23 November 2022. *** Good evening. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcement and the Bank of Canada's Monetary Policy Report (MPR). In October, we raised the policy interest rate by 50 basis points to 3.75%. This is the sixth consecutive increase since March. We also expect our policy rate will need to rise further. How much further will depend on how monetary policy is working to slow demand, how supply challenges are resolving and how inflation and inflation expectations are responding to this tightening cycle. Our decision reflected several considerations. First, inflation in Canada remains high and broad-based, reflecting large increases in both goods and services prices. Inflation has come down in recent months, but we have yet to see a generalized decline in price pressures. Second, and related, the economy is still in excess demand-it's overheated. Job vacancies have declined from their peak but remain high, and businesses continue to report widespread labour shortages. Third, higher interest rates are beginning to weigh on growth. This is increasingly evident in interest-rate-sensitive parts of the economy, like housing and spending on big-ticket items. But the effects of higher rates will take time to spread through the economy. Fourth, there are no easy outs to restoring price stability. We need the economy to slow down to rebalance demand and supply and relieve price pressures. We expect growth will stall in the next few quarters-in other words, growth will be close to zero. But once we get through this slowdown, growth will pick up, our economy will grow solidly, and the benefits of low and predictable inflation will be restored. To put this in numbers, growth in gross domestic product (GDP) is projected to decline from about 3¼% this year to just under 1% next year and then rise to 2% in 2024. And inflation is expected to hover around 7% in the final quarter of this year, fall to around 3% by the end of next year and return to the 2% target by the end of 2024. Finally, we are trying to balance the risks of under- and over-tightening. If we don't do enough, Canadians will continue to endure the hardship of 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. 1/2 BIS - Central bankers' speeches If we do too much, we could slow the economy more than needed. And we know that has harmful consequences for people's ability to service their debts, for their jobs and for their businesses. This tightening phase will draw to a close. We are getting closer, but we are not there yet. I also want to update you on the Bank of Canada's balance sheet, which is declining as we continue quantitative tightening. The balance sheet peaked in March 2021 at $575 billion, and as of last week, it was at about $415 billion, a decline of about 28%. The decline primarily reflects the maturity of our repo operations and the reduction in our holdings of Government of Canada bonds following decisions to end quantitative easing in October 2021 and begin quantitative tightening in April. After a period of above-average income, our net interest income is now turning negative. Following a period of losses, the Bank of Canada will return to positive net earnings. The size and duration of the losses will ultimately depend on a number of factors, including the path of interest rates and the evolution of both the economy and the balance sheet. The losses do not affect our ability to conduct monetary policy. I would also stress that our policy decisions are driven by our price and financial stability mandates. We do not make policy to maximize our income. The Bank of Canada's job is to ensure inflation is low, stable and predictable. We are still far from that goal. We view the risks around our forecast for inflation to be reasonably balanced. But with inflation so far above our target, we are particularly concerned about the upside risks. We are mindful that adjusting to higher interest rates is difficult for many Canadians. Many households have significant debt loads, and higher interest rates add to their burden. We don't want this transition to be more difficult than it has to be. But higher interest rates in the short term will bring inflation down in the long term. Canadians are looking for ways to protect themselves from rising prices, and we are working to protect them from entrenched inflation. It will take time to get back to solid growth with low inflation. But we will get there. By working through this difficult phase, we will get back to price stability with sustained economic growth, which benefits everyone. With that summary, Senior Deputy Governor Rogers and I are now pleased to take your questions. 2/2 BIS - Central bankers' speeches
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Remarks by Ms Sharon Kozicki, Deputy Governor of the Bank of Canada, at the Urban Development Institute of Quebec, Montreal, Quebec, 8 December 2022.
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Remarks by Sharon Kozicki Deputy Governor Urban Development Institute of Quebec December 8, 2022 Montréal, Quebec Economic progress report: More transparency in uncertain times Introduction Good afternoon. Thank you for inviting me to join you for this discussion. It’s always a pleasure to visit Montréal. Delivering an update on the state of the economy from one of our country’s most significant economic engines seems fitting. And the fact that we’re doing so today at the Urban Development Institute of Quebec (UDI) seems particularly appropriate—especially when we consider how much the UDI contributes to this thriving city. I’m here today to deliver an economic progress report. Together with other initiatives that have been introduced over the years to increase the amount of information and analysis we provide Canadians— especially around our interest rate decisions—speeches like today’s help clarify what the Bank of Canada does. I’ll begin where we often do with these economic progress reports—by going over yesterday’s rate decision and how we came to it. After that I’ll provide an update on what’s been happening in the economy since October’s Monetary Policy Report, including trends that we’re keeping an eye on. Finally, in the spirit of openness that this speech represents, I want to review some of the things the Bank does to be accountable to Canadians—the people we serve. This includes a new transparency initiative that we’ll be introducing this January. Yesterday’s decision So, let’s dive right in. Yesterday, the Bank’s Governing Council decided to increase the policy interest rate by 50 basis points, to 4¼%. Our deliberations centred on the three areas we said we would be watching closely: how supply challenges are resolving, how higher interest rates are slowing demand, and how inflation and inflation expectations are evolving. I would like to thank Mikael Khan and Daniel de Munnik for their help in preparing this speech. Not for publication before December 8, 2022 12:30 Eastern Time On supply challenges, while we continue to see signs of easing, progress is slow and could continue to be disrupted by geopolitical events. Here in Canada, we assessed the extent to which continued labour market tightness is serving as a key impediment to improving domestic supply, in both goods and services. With respect to the impact of our monetary policy actions, there is growing evidence that tighter monetary policy is restraining domestic demand. That said, growth in gross domestic product (GDP) in the third quarter was stronger than expected, and the economy continued to operate in excess demand. With the labour market still tight and businesses still finding it easy to raise their prices, Governing Council agreed that the economy still needs a more sustained moderation of demand. Finally, on inflation and inflation expectations, Governing Council agreed that we continue to see a mixed picture. On one hand, inflation remains too high, with many of the goods and services Canadians regularly buy showing large price increases. On the other hand, three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum. Alongside yesterday’s decision, we indicated that that going forward, we will be considering whether to increase rates further. By that, we mean that we expect our decisions will be more data-dependent. If we are surprised on the upside, we are still prepared to be forceful. But we recognize that we have raised interest rates rapidly and that their effects are working their way through the economy. In other words, we are moving from how much to raise interest rates to whether to raise interest rates. Our next policy decision is in January, and we will make that decision with the benefit of another seven weeks of data and an updated economic projection. Gauging how monetary policy is working So that gives you some insight into yesterday’s decision. Now let’s take a closer look at how we assess what’s happening in the economy and what we are seeing. The Bank collects and interprets data from a wide variety of sources to assess changing circumstances and their implications for inflation. We continue to be in an unprecedented economic environment. We have been using non-traditional high-frequency data on activities such as retail transactions, hotel and restaurant reservations and the use of public transportation systems.1 As well, our surveys of the business community—the Business Outlook Survey and the Business Leaders’ Pulse—provide many useful insights. We are very grateful to those of you who may have participated in these surveys. Fresh 1 To better connect with households and businesses, we have also added new high-frequency surveys to our tool kit. Specifically, we have introduced the experimental Daily Internet Survey of Confidence and the monthly Business Leaders’ Pulse to complement our quarterly Business Outlook Survey and Canadian Survey of Consumer Expectations. Starting in February 2023, we will also begin publishing results from our quarterly Market Participants’ Survey. See A. Demers, S. Gignac and T. Gomes, “Introducing the Bank of Canada’s Market Participants’ Survey,” Bank of Canada Staff Analytical Note (forthcoming). -3sources of data like these are particularly informative about short-term momentum in the economy and allow us to see developing trends sooner. In terms of how we interpret data, we look at a wide variety of sources to get a sense of overall activity in the economy. But we don’t just look at the numbers in isolation. We interpret those numbers in the broader context of everything we see. We then combine all these data using models to develop different scenarios for our outlook. One example is our density nowcast model, which covers a whole range of possible outcomes for the current growth rate in the Canadian economy. It also shows how likely each of those scenarios is.2 We know that single points of data can appear volatile from month to month. By combining information in different ways, we avoid distractions and the trap of focusing too narrowly on any one piece of information. The economy is slowing but excess demand persists Since last March, we’ve taken forceful monetary policy actions. This policy tightening has been affecting the economy. As I said earlier, when we look at the data, we are seeing a softening of demand in interest-sensitive areas. The softening started in the second quarter when housing resales contracted significantly. In the third quarter, GDP growth remained solid. However, there was another significant contraction in housing activity as well as a decline in goods consumption. In part, this slowing reflects shifts in consumer behaviour as we all return to more normal spending patterns with the removal of pandemic restrictions. But the largest shifts in spending have been in the most interestsensitive areas, suggesting our monetary policy actions are working to rebalance supply and demand. In hard-to-distance services—things like restaurants and hotels—we are also starting to see some slowing of growth. Softening is likely to continue further because the boost in growth that this sector experienced after the reopening of the economy is now mostly behind us. Overall, we are seeing some signs that demand is slowing but we’re still in excess demand. We’ve all seen evidence of this excess demand, such as long delivery times, waiting to get into restaurants, finding out that the item you want to purchase has sold out, or business owners not concerned about losing customers when they raise prices. And of course, excess demand can also show up through inflation. This is what I want to talk about next. 2 See T. Chernis and T. Webley, “Nowcasting Canadian GDP with Density Combinations,” Bank of Canada Staff Discussion Paper No. 2022-12 (May 2022). -4Inflation is still too high Since peaking at 8.1% in June, inflation has declined to 6.9%. And when we strip out volatile price changes, we see that year-over-year core inflation also stopped rising in the past couple of months, plateauing at around 5%. There are also early indications that momentum in inflation is easing. Three-month rates of core inflation have declined to about 3½%. This easing is visible across various subcomponents of the consumer price index. For instance, price increases for various durable goods are starting to ease as consumer spending has softened and global supply disruptions have lessened. And our rate increases have helped cool the unsustainably hot housing market. With the decline in house prices, shelter inflation has moderated, despite rising interest costs and rents. These developments are encouraging, but as I mentioned earlier, we also see some reasons for concern. Overheated domestic demand continues to drive price increases in hard-todistance services such as hotels and restaurants. A better balance of demand and supply could take time to have an impact here. Another area where we have seen less progress is food price inflation— especially compared with inflation of other goods. Prices here have continued to increase despite most agricultural commodity prices being well below their pandemic highs. To make meaningful progress toward our inflation target, we need to see threemonth rates of inflation come down even further and be sustained. In short, there remains a firmness or stickiness to inflation—and to near-term inflation expectations. Inflation expectations remain a concern I’d like to spend a little time explaining why the Bank has been closely monitoring what is happening with inflation expectations. It’s because history has shown us that high inflation expectations can lead to higher and more persistent inflation. This was the bitter experience of the 1970s. During that decade, we saw both high unemployment and high inflation. A key challenge at that time was that inflation expectations kept rising. Remember, this was before central banks adopted inflation targeting. This means there was no target to anchor expected inflation. As a result, households and businesses saw no reason to believe that prices wouldn’t simply continue to climb at a rapid pace. They then baked this assumption into their decisions and plans. As a result, even as the economy cooled, inflation remained stubbornly high. Chart 1 helps us visualize what can happen when inflation expectations aren’t held in check. It shows what economists refer to as the Phillips curve, which is an economic theory that inflation and unemployment have an inverse relationship in the short run: when one goes up, the other goes down. In the chart, each blue dot shows the data for one month. But, as we can see from the experience of the 1970s, the Phillips curve isn’t always stable. In Chart 1, panel a, the curve shifted. Inflation expectations weren’t anchored during that decade. Declines in demand didn’t translate into -5lower inflation. Both unemployment and inflation increased because the Phillips curve shifted up and to the right. In panel b, we look at the curve during inflation targeting of 2%, from 1995 to today. Just like the first part of the 1970s, we have seen declining unemployment and rising inflation. But, unlike the 1970s, long-term inflation expectations are currently well anchored at our 2% target. Our job is to use our monetary policy tools to maintain that anchor. This would allow us to gently slide back down the steep portion of the Phillips curve and achieve our inflation target without the kind of large increase in the unemployment that we have seen in past recessions. We’ve been forceful in our interest rate increases since last March for this very reason—to try to keep inflation expectations anchored. The 1970s taught us—the hard way—that once inflation expectations de-anchor, nothing works well. And the costs of restoring price stability are a lot higher. Chart 1: When inflation expectations are anchored, inflation can fall without a large rise in unemployment Core inflation (%) a. 1970s High inflation expectations (late 1970s) Core inflation (%) b. 1995–2022 Inflation-targeting era of 2% (well-anchored inflation expectations) [Grab your reade r’s Low inflation attent expectations ion(early 1970s) with a Unemployment Unemployment rate (%) great rate (%) quote monthly data points for core inflation and the unemployment rate. Note: Each blue dot represents from the Transparency docu ment in the economy, it’s more important than ever that we With all of this happening or with Canadians. communicate openly use The Bank started on a path to be more open in our communications with the this beginning of inflation targeting in the early 1990s. Increasing transparency spac e to emph asize 3 Panel a uses the consumer price index (CPI) excluding food and energy prices since our a key preferred measures of core inflation do not go back to the 1970s. Panel b uses CPI-median but point. looks similar if the other preferred measures are used instead. To place this text -6helped anchor inflation expectations and reinforced the credibility of our monetary policy framework. We have taken many actions over the past 30-some years to help Canadians better understand our decisions and the kinds of issues that preoccupy us. This includes: • publishing our Monetary Policy Report • issuing news releases to explain our decisions • expanding the Governor’s opening statement at news conferences to provide more insights into the issues that we discussed during our policy deliberations We are also releasing more data and analysis than ever before. And we’ve greatly expanded our educational materials online and through our museum. In addition, we have been listening more: • Through the work of our regional offices, we regularly engage with the private sector and financial market participants to gather perspectives and identify local economic developments. • Our Governor and Deputy Governors are also engaging with a more diverse group of stakeholders from the business world, labour groups and civil society organizations. The Bank has also been actively exploring additional ways to enhance transparency, especially around our monetary policy decisions.4 Earlier this year, we volunteered to undergo a pilot review of our broader transparency practices under the International Monetary Fund’s new Central Bank Transparency Code.5 In its report, the International Monetary Fund recognized that the Bank sets a high benchmark for overall transparency. In addition, the report characterizes the Bank’s monetary policy framework as comprehensive, transparent and understandable. The report also contained recommendations, including that the Bank begin publishing a summary of deliberations after each of our policy decisions— something that we were already considering. Starting in January, we will do exactly that. Roughly two weeks after each monetary policy decision, we will publish a summary of deliberations on our website. 4 For background information on the approaches taken by other central banks in publishing information on their policy deliberations as well as issues of particular relevance to the Bank of Canada, see M. Jain, W. Muiruri, J. Witmer, S. Kozicki and J. Harrison, “Summaries of Central Bank Policy Deliberations in a Canadian Context,” Bank of Canada Staff Discussion Paper (forthcoming). 5 Bank of Canada, “Bank of Canada response to detailed review report.” -7As a public institution, the Bank has a responsibility to operate in a transparent way. This new summary will provide an additional window into the views that were shared during our deliberations and will shed light on Governing Council’s consensus-building process. By providing more insights into our monetary policy decisions, we can help Canadians understand what we are doing and why. This will enhance our accountability. Beyond that, we know that the more people understand what we do and why, the more they trust us. And that makes monetary policy work better. Being open is always important, but it is especially crucial in uncertain times— and as we work to bring inflation back to our 2% target. Conclusion It’s time for me to conclude. CPI inflation remained at 6.9% in October, with many of the goods and services Canadians regularly buy showing large price increases. Measures of core inflation are around 5%. Three-month rates of change have come down, providing some early indications that as demand slows, price pressures may be losing momentum. But the economy remains in excess demand, inflation is still too high and broadly based, and short-term inflation expectations remain elevated. That is why we made the decision we did yesterday. Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target. We will continue to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. We know this is a very challenging time for Canadians. Increased borrowing costs in the near term will deliver the benefits of low inflation, but only with a delay. It will take some time, but we will get there. It’s what Canadians want and it’s what they expect from us. Inflation that is low and predictable helps money keep its value and makes it easier for everyone to plan how they spend. This helps the economy expand in a sustainable way, generating higher incomes and new jobs. We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians. Yesterday’s decision moves us another step closer to this goal.
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Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Business Council of British Columbia, Vancouver, British Columbia, 12 December 2022.
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Tiff Macklem: Putting the resolute in resolutions - looking ahead to lower inflation Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Business Council of British Columbia, Vancouver, British Columbia, 12 December 2022. *** Introduction Good afternoon. It's a great pleasure to be here. I want to thank the Business Council of British Columbia for inviting me to speak today. I am particularly looking forward to sitting down after my remarks and discussing the issues facing the province, the challenges confronting the Canadian economy and the questions being put to the Bank of Canada. This is my final speech of 2022-and what a year it has been. A year-end speech often looks back at what's happened and ahead to what's next. This one fits that mould. What's different is that nothing about our recent economic experience fits the mould of the last 30 years. The pandemic brought on-again, off-again shutdowns to the global economy, dramatic shifts in the goods and services consumers wanted to buy, and a myriad of hurdles for producers to supply them. All of this, combined with Russia's horrific aggression in Ukraine, has brought sharply higher inflation and rapidly rising interest rates. Last week, we raised our overnight policy rate by 50 basis points to 4.25%, our seventh consecutive rate increase since we began raising interest rates in March to fight inflation. Deputy Governor Sharon Kozicki explained our decision in a speech last Thursday. Today, I'd like to provide a broader perspective. I want to reflect on what we've learned in 2022, discuss what could lie ahead and explain what we're focused on at the Bank of Canada. It's a bit early for New Year's resolutions, but I already know what ours is: Restore price stability. We are resolute in our commitment to return inflation to the 2% target. Higher interest rates are working to rebalance the economy. Domestic demand is slowing, and we expect growth in gross domestic product will be close to zero through to the middle of next year as the economy adjusts to higher interest rates. This will relieve domestic price pressures, and inflation will come down. The adjustment will not be easy, but restoring price stability is the most important thing we can do to improve the economic and financial well-being of Canadians. Looking back A year ago, the economy was getting closer to capacity, but we were still coping with new waves of the COVID-19 virus. Unemployment was a percentage point higher than it is now. Supply chain disruptions combined with strong global demand for goods had driven total consumer price index inflation up to 4.7%, but services price inflation 1/5 BIS - Central bankers' speeches remained relatively low, and inflation was not broad-based. At that time, we expected supply issues to gradually resolve and inflation to come down to close to our 2% target by the end of 2022. At about 7% today, inflation is a long way from what we had expected. What happened? Three things surprised us. First, supply problems-both global and domesticproved to be more persistent and pervasive than we had anticipated. This put upward pressure on many prices. Second, Russia invaded Ukraine, sending prices for energy and agricultural goods sharply higher. And third, once we got through the Omicron wave early in the new year, the economy fully reopened, and consumers wanted to catch up quickly on what they had missed for two years. But businesses could not keep up with demand, and this put significant upward pressure on services prices. With the information we had a year ago, it was impossible to foresee all these developments. But it's too convenient to write off the high inflation of 2022 as just bad luck. We need to reflect on what we learned. I see three lessons. First, restoring supply is harder than restoring demand. Hyper-efficient global supply chains are a marvel of system design, transportation and logistics. And when they are working, we take them for granted. But the pandemic reminded us that a chain is only as strong as its weakest link. With the waves of the virus hitting different parts of the world at different times, supply and demand could not recover in tandem. Moreover, the large shift in demand during the pandemic toward goods and away from services put even more pressure on clogged supply chains. Businesses couldn't meet customer demand, and prices of goods rose sharply. With hindsight, the monetary and fiscal policy tools that were used to stabilize the economy worked effectively to support demand during the pandemic, but we underestimated the supply challenges. Second, averages can obscure inflationary pressures. We need a more granular understanding of the balance between demand and supply when the forces driving demand diverge dramatically across sectors. Public health measures restricted the demand for services. At the same time, other parts of the economy were experiencing excess demand as consumers bought goods to replace the services they couldn't get. But the inflationary impact of excess demand for goods was larger than the disinflationary forces in close-contact services. As a result, our inflation models that focus on the average or aggregate imbalance between demand and supply in the economy had a hard time predicting the rise in inflation. Third, supply disruptions are more inflationary when the economy is overheated. For the last 30 years, supply shocks-typically energy-have tended to have a temporary effect on inflation. A run-up in oil prices, for example, would boost inflation for a year or so, but oil prices would typically plateau or reverse, and inflation would come back down all by itself. Since it takes more than a year for the full effect of monetary policy to work through the economy, central banks have tended to look through the direct impact of supply disruptions on inflation. That means we don't respond by raising interest rates. This year, the inflation response was different. As I've already mentioned, we were faced with a series of negative supply shocks just as the economy was reopening. And 2/5 BIS - Central bankers' speeches the effects of these supply shocks on prices and inflation was faster and more pronounced than usual. Businesses, flush with customers, weren't worried about raising their prices. So they passed on the higher input costs more quickly to final goods prices. And customers, eager to finally buy what they wanted, paid the higher prices. As a result, the impact on inflation of the energy and agricultural price shocks was faster, larger and more widespread than our models suggested. In sum, since we started inflation targeting in the early 1990s, we have not been hit by large negative supply shocks at the same time as our economy was overheating. The lesson from 2022 is that even if long-term inflation expectations are well anchored, when the economy is in excess demand, businesses raise their prices more quickly and by more when their costs increase. All three lessons are linked, and we have taken them to heart. You don't get 8% inflation because one thing went wrong. Our experience in 2022 is that surprises can combine and interact with each other, resulting in outsized effects on inflation. I'd be pleased to talk more about these lessons and how we are adapting in our discussion, but now I want to look ahead to 2023. Looking ahead Our top priority is getting inflation back to the 2% target. By raising interest rates, we are trying to dampen demand so supply can catch up. That will bring the overheated economy back into balance, and inflation will come down. Interest rate increases have begun to work, but they will take time to feed through the economy. We have increased interest rates rapidly both because inflation rose quickly and because the economy was overheating. Once we started to see the momentum in domestic demand, we moved forcefully. Since March, we have raised our policy rate by four percentage points. Increasing rates rapidly to rebalance demand and supply and to keep long-run inflation expectations anchored to our target is our best chance of restoring price stability without a severe economic contraction. At last week's decision to raise the policy rate by 50 basis points we indicated that, looking ahead, we will be considering whether there is a need to increase the policy rate further. This means that decisions to raise the rate or to pause and assess the impact of past rate increases will depend on incoming data and our judgments about the outlook for inflation. We are trying to balance the risks of over- and under-tightening monetary policy. If we raise rates too much, we could drive the economy into an unnecessarily painful recession and undershoot the inflation target. If we don't raise them enough, inflation will remain elevated, and households and business will come to expect persistently high inflation. With inflation running well above target, this is the greater risk. If high inflation sticks, much higher interest rates will be required to restore price stability, and the economy will have to slow even more sharply. We are watching very closely to see how the economy is responding to higher interest rates. We are looking at an expanded range of labour market indicators to assess the 3/5 BIS - Central bankers' speeches balance in the job market and the impacts on workers. We're watching to see how supply chains are resolving and how businesses are passing on changes in costs to consumers. We're also keeping an eye on measures of core inflation to gauge underlying inflationary pressures. And finally, we're closely watching inflation expectations because keeping them well anchored is critical to restoring price stability. Looking beyond tomorrow Over the two decades up to 2020, a number of disinflationary forces helped keep inflation low. A relatively stable global political landscape combined with a broad consensus in favour of free markets and international trade encouraged investment and supported productivity. Technological advancements also lifted global productivity, shrank distances and lowered costs. The entry into the global trade system of vast new labour markets in China and Eastern Europe pushed down the prices of many traded goods. Global supply chains grew rapidly, minimizing costs by linking the global economy through heightened specialization and trade. These supply developments all fostered a period of solid growth, low inflation and low interest rates. But these forces are now shifting. The failure to adequately share the benefits of growth has fuelled populism that is causing countries to turn inward. Support for globalization is stalling or even reversing, and productivity growth is trending down. And as the growth in the working-age population slows and businesses find it harder to hire workers, there could be persistent upward pressure on wages. If higher wage costs are not matched by improvements in productivity, the costs of production will increase. Almost three years of the pandemic and the invasion of Ukraine by Russia have also highlighted some of the vulnerabilities of interconnected trade. The pandemic made clear that relying too much on highly specialized supply chains can have downsides. And Russia's weaponization of its natural gas supply has underscored the risks of assuming all countries share the same interests in peace and prosperity. Rising geopolitical tensions, more broadly, have underscored the fragility of some business relationships. In the future, it seems likely that supply chains will be shorter, more diversified and more resilient. Trade will likely narrow to more trusted partners. These changes will increase resilience but at the cost of efficiency. And through this adjustment, production costs could rise, increasing price pressures. Over the long term, it seems likely that we won't have the same disinflationary forces that we've had for the past 30 years. These potential developments could make it harder to bring inflation back to the 2% target and keep it there. But how much harder is very difficult to say. These are fundamental uncertainties we'll need to confront in the years ahead. But by constantly focusing on achieving the 2% inflation target, our monetary policy framework is well designed to address uncertainty and adapt to new developments. If the inflationary forces going forward are stronger than we expect, we will start to see inflation coming in above our forecasts. And we will adjust our policy settings to achieve the 2% target. If, on the other hand, disinflationary forces return and inflation starts to come in below our forecasts, again we will adjust to hit the target. Assessing the 4/5 BIS - Central bankers' speeches impacts of shifting forces will be difficult in the moment, but we can be confident that our framework is designed for all seasons. Conclusion Let me conclude. I've spent most of my time talking about hard lessons and difficult decisions. But I want to end on a note of optimism. While global forces are shifting, the future will be a lot better than the last three years. Aging demographics, rising geopolitical tensions and climate change all mean global economies could face more supply shocks than in the past. But even if volatility does not return to the pre-pandemic level, we can expect it will be much lower than what we have all endured these past three years. I also want to stress that the future is not destiny-what we do now will influence how we are positioned when the future arrives. The more we invest in increasing supply through trade, automation, innovation, training and immigration, the faster the Canadian economy can grow without creating inflationary pressures. Canada thrives in a world of open trade and investment flows, and its market access is among the best in the world. We need to protect this and deepen our trading relationships. Businesses need to look to the future and leverage automation to free up workers for higher-value roles and provide training to prepare them for these opportunities. Governments need to foster innovation and ensure Canada remains a country of choice for new immigrants. The Bank of Canada's job is to ensure price stability. Low, stable and predictable inflation is fundamental to a well-functioning and growing economy that delivers prosperity for its citizens. People ask me why we need to be so aggressive about raising interest rates to combat inflation. They also ask me why we need to get inflation all the way back to 2%. It's simple even though it can be difficult. The longer inflation remains high, and the higher it is, the harder it is for Canadians to plan their spending and savings. Inflation erodes the value of money. It distorts and confuses the information and incentives that consumers, businesses, entrepreneurs, savers and investors rely on to make their economic decisions. It feeds frustration, social tensions and a sense of unfairness. We want to restore price stability in the best way possible for Canadian workers and businesses. We know the adjustment is difficult. But it will be worth it. Our monetary policy is working, and once we all get through this adjustment, our economy can grow healthily with low inflation. That's what lies ahead if we follow through. Our resolution is simple, and our resolve is absolute. We will restore price stability for all Canadians. Thank you. I would like to thank Don Coletti and Césaire Meh for their help in preparing this speech. 5/5 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 25 January 2023.
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Tiff Macklem: Release of the Monetary Policy Report Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 25 January 2023. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's policy announcement and the Bank's Monetary Policy Report (MPR). Our policy decision today has two elements. First, we raised our policy interest rate by 25 basis points to 4.50% and we are continuing quantitative tightening. Second, if economic developments evolve broadly in line with the forecast we published today, we expect to hold the policy rate at its current level while we assess the impact of the cumulative 425-basis-point increase in our policy rate. We have raised rates rapidly, and now it's time to pause and assess whether monetary policy is sufficiently restrictive to bring inflation back to the 2% target. The decision At our last two policy decisions, the Governing Council said we would be assessing how tighter monetary policy is working to slow demand, how supply chains are evolving, and how inflation and inflation expectations are responding. These assessments, together with our revised forecast, were important inputs into our policy decision. Recent data suggest the restrictive stance of monetary policy is dampening household spending, particularly on housing and big-ticket items. But economic growth and employment in the second half of 2022 were stronger than we expected. And so, excess demand in the economy has persisted, putting continued upward pressure on prices. Simply put, our overheated economy did not cool as much as we expected. Global supply chains, on the other hand, are resolving more quickly than expected. While they are not yet back to normal in Canada, we've seen substantial progress. Consumer price index (CPI) inflation declined to 6.3% in December, reflecting lower global energy prices and some moderation in the prices for durable goods as supply improved and demand softened. Lower gasoline prices are welcome, but prices of essentials like groceries and rent continue to increase too quickly. Measures of core inflation have also been stuck at about 5%. With 3-month rates below year-over-year increases, core inflation will likely start to come down in the months ahead. Still, core inflation needs to continue to decline for total CPI inflation to get back to the 2% target. Regarding expected inflation, our surveys indicate that fewer households and businesses think inflation will stay high for a long time, but short-term inflation expectations remain elevated and are above our own inflation forecast. 1/3 BIS - Central bankers' speeches Based on these assessments, the Governing Council concluded that a further modest increase in the policy rate is appropriate. The Bank's ongoing program of quantitative tightening is complementing this restrictive stance. We know it takes time for higher interest rates to work through the economy to slow demand and reduce inflation. And given the speed and magnitude of the interest rate increases over the last year, their full effect is still to come. We can also see that the interest rate increases we've undertaken to date are already working. Higher rates are slowing household spending, and inflation is coming down. With today's modest increase, we expect to pause rate hikes while we assess the impacts of the substantial monetary policy tightening already undertaken. To be clear, this is a conditional pause-it is conditional on economic developments evolving broadly in line with our MPR outlook. If we need to do more to get inflation to the 2% target, we will. We are trying to balance the risks of under- and over-tightening. If we do too little, the decline in inflation will stall before we get back to target. But if we do too much, we will make the adjustment unnecessarily painful and undershoot the inflation target. The economic outlook Two weeks from now, on February 8, we will publish for the first time a more detailed summary of Governing Council's deliberations. This summary will provide more insight into our decision making, so I can be brief today. But let me say a few words about our economic outlook. Globally, inflation remains high and broad-based. It has receded from its peak in many countries, largely due to lower energy prices and an easing of supply chain disruptions. Economic growth in the United States and the euro area has been stronger than we expected, but activity is slowing. Labour markets remain tight. With inflation still far too high, many central banks have continued to increase policy rates to slow demand and bring inflation down. The Bank estimates the global economy grew by about 3½% in 2022, and will slow to about 2% in 2023 and 2½% in 2024. Russia's invasion of Ukraine continues to create uncertainty, particularly in Europe. China's abrupt lifting of COVID-19 restrictions is a new uncertainty which poses upside risks to global commodity prices. In Canada, the economy remains overheated and clearly in excess demand. Tight labour markets have shown only modest signs of easing. Job vacancies have come down a little but remain elevated, the unemployment rate is near historic lows, and many businesses continue to report labour shortages. 2/3 BIS - Central bankers' speeches But, as I said, higher interest rates are working to help the economy rebalance. Household spending has moderated. Demand for furniture and appliances has decreased, and housing market activity and prices have declined substantially. As pentup demand diminishes, spending on services should ease. Higher rates are also expected to continue to slow business investment, and weaker foreign demand will weigh on exports. Putting this together, we expect growth in Canada to stall through the middle of this year before picking up later in the year. We project that, on an annual average basis, growth in Canada's gross domestic product will slow from about 3½% in 2022 to about 1% in 2023 and 2% in 2024. Lower energy prices, improved global supply chains and slowing demand should bring inflation down significantly this year. We expect CPI inflation to fall to around 3% in the middle of this year and reach the 2% target in 2024. Needless to say, there are risks around this projection. The biggest near-term risk is that global energy prices could increase, pushing inflation up globally. We're also concerned that if inflation expectations remain elevated in Canada or increases in labour costs persist, inflation will not come down as quickly as we have forecast. Overall, we view the risks around our inflation forecast as balanced, but with inflation still well above our target, we continue to be more concerned about the upside risks. If these upside risks materialize, we are prepared to raise interest rates further. I want to leave you with a few key messages. The decline in inflation since the summer is welcome relief for the many Canadians who are struggling to keep up with the rising cost of living. But at more than 6%, inflation remains too high. To combat inflation, the Bank of Canada responded forcefully, raising its policy interest rate from 0.25% a year ago to 4.50% today. It's working. We are turning the corner on inflation. We're still a long way from our target, but recent developments have reinforced our confidence that inflation is coming down. And we are committed to getting inflation all the way back to 2%, so that Canadians can once again count on low, stable and predictable inflation and sustainable economic growth. With that overview, the Senior Deputy Governor and I would be pleased to take your questions. 3/3 BIS - Central bankers' speeches
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Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the CFA Quebec, Quebec, 7 February 2023.
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Remarks by Tiff Macklem Governor of the Bank of Canada CFA Québec February 7, 2023 Québec, Quebec Monetary policy at work Introduction Good afternoon. It’s a pleasure to be here in Québec to speak to you about monetary policy and the economy. As we approach the three-year mark of the COVID-19 pandemic in Canada, we are also entering a new phase in monetary policy. In 2022, we faced an overheated economy and high inflation, and we responded forcefully, increasing our policy interest rate rapidly. The year ahead will be different. In January, after eight consecutive interest rate increases, we said that we expect to hold the policy rate at its current level, conditional on the outlook for inflation. We are pausing to assess how well our interest rate increases are working to bring inflation down. With inflation above 6%, we are still a long way from the 2% target. But inflation is turning the corner. Monetary policy is working. That’s what I’d like to talk about today—how, exactly, monetary policy works to control inflation. I’ll outline what we’ve done so far, what the impact has been and what we expect going forward. I also want to talk about the risks and uncertainties that we are facing as we work to get inflation back to target. Canadians know inflation is high. They see it at the grocery store, when they pay their rent and when they go to a restaurant or on a trip. And they know that we’ve increased interest rates. They see that in higher costs for borrowing—in mortgage rates, lines of credit and business loans. But it is less obvious how higher interest rates are working to bring inflation down. Since March, we’ve raised the policy rate by 4¼ percentage points. In recent months, inflation has levelled off and has begun to ease. The considerable tightening we’ve done will continue to work its way through the economy, and this will rebalance demand with supply and slow inflation. So how does this work? The transmission mechanism On the face of it, the Bank’s approach to monetary policy is simple. We’re an inflation-targeting central bank. We have a 2% inflation target, and that’s about I would like to thank Erik Ens, Corinne Luu, Césaire Meh and Patrick Sabourin for their help in preparing this speech. Not for publication before February 7, 2023 12:30 pm Eastern Time where inflation has been, on average, for 30 years—at least until the pandemic hit. When inflation strays from that target, we have one main tool to get it back to 2%—the policy interest rate. During times of crisis, we can use other tools, but usually we have one target and one tool. In practice, monetary policy is made more complicated by at least three realities. First, the influence of our policy interest rate on inflation is indirect. Second, it takes time to work—up to two years to have its full effect—and over that time, new developments will buffet the economy and inflation. Because monetary policy takes time, we have to try to look ahead to where inflation will be. And third, because we know new developments will always arise, we need to be humble about our forecasts and prepared to adjust to changing circumstances. Economists have a fancy name for the process through which changes in our policy rate affect inflation—they call it “the monetary policy transmission mechanism.” This mechanism works the same whether we’re raising rates or lowering them. But since we’ve been raising interest rates, let’s talk about that (Figure 1). Figure 1: The transmission mechanism of monetary policy When we raise the policy rate, it immediately costs more for banks to borrow from each other or from us. In response, they increase their rates for loans and deposits. That means that people get a higher return on their savings. But it also means they pay more interest on loans. Higher interest costs discourage people from borrowing. That might mean fewer people take out a mortgage to buy a home. They might delay buying a new car because the loan is more expensive. Or they might put off that kitchen renovation or family vacation. That’s why sectors that are sensitive to interest rates, like housing, are often the first to slow when we raise interest rates—it’s a pretty direct channel. We also typically see demand for big-ticket items like cars and household appliances slow because people often borrow money to buy them. Higher rates also have knock-on effects further into the economy. Construction slows down. Households with mortgages have less money to buy other things. Production slows down as demand weakens. Businesses may cut their investment plans because the cost of borrowing has gone up or demand has fallen off. Higher Canadian interest rates also make Canada more attractive to foreign investors. That means that, if everything else stays the same, the Canadian dollar will rise. This makes foreign goods less expensive for Canadians to buy, so the country imports less inflation. And it makes Canadian exports more expensive in foreign markets, slowing international demand for these goods and services. So higher policy rates mean lower demand at home and from abroad. And with less demand, growth in our economy slows. That doesn’t sound like a good thing, but when the economy is overheated, it is. When demand runs ahead of supply, inflation faces upward pressure. Slowing the economy lets supply catch up with demand, and that relieves inflationary pressures. Monetary policy also influences expectations of future inflation. That’s important because inflation today is also affected by what people think inflation is going to be in the future. Let me explain. If households and businesses think inflation is going to be low, businesses will be cautious about raising their prices out of fear that they will lose customers. And that keeps inflation low. But when consumers think inflation will be high, businesses don’t worry as much that higher prices will scare off customers, so they are more inclined to raise them. That’s why we have been so determined to keep inflation expectations well anchored at the 2% inflation target. We do that mostly through communication—by being crystal clear we are committed to restoring price stability—and by backing those words with action. To summarize, the Bank directly controls only the first step—the change in the policy rate. The other steps in the transmission mechanism are less direct, and they take time to have their full effect. Impact of higher policy rates so far When we began raising rates in March 2022, the economy was reopening after the fourth wave of the COVID-19 virus. As momentum built in the months that followed and the economy moved clearly into excess demand, we increased rates in unusually large steps. Russia’s unprovoked attack of Ukraine in February also sent global energy and food prices sharply higher, which added considerably to inflation in Canada. We’ve been raising rates for almost a year now—from ¼% to 4½%. And we are seeing their impact. Borrowing rates and the exchange rate Increases in the policy rate have raised borrowing rates for households and businesses (Chart 1). The average five-year variable mortgage rate rose from 1.5% to 5.9% between January 2022 and January 2023, and the average fiveyear fixed mortgage rate rose from 2.8% to 5.1% over the same period. The prime rate, which is a benchmark for business loans, rose from 2.5% to 6.5%, and longer-term corporate borrowing rates are up about 2 percentage points. Chart 1: Borrowing costs have risen % Policy rate Five-year variable mortgage rate Long-term corporate borrowing rates January 2022 January 2023 Note: Values are monthly averages. Long-term corporate borrowing rates reflect rates on investment-grade corporate bonds. Sources: Bloomberg Finance L.P., Lender Spotlight and Bank of Canada Last observation: January 2023 Changes to our policy rate have also affected the exchange rate. But the exchange rate channel has been more muted than usual. Because the US Federal Reserve was also raising rates rapidly through 2022, the Canadian dollar did not appreciate against the US dollar. It did rise initially against other currencies—like the euro—until these jurisdictions also began forcefully raising their policy rates. This fight against inflation is a global one— we’re not fighting it alone.1 After 11 months of policy rate increases, we’re seeing signs that higher interest rates are beginning to rebalance the economy. Household spending has moderated, particularly in interest-rate-sensitive sectors. The labour market remains tight, but early signs of easing are evident. Inflation has declined, and our surveys of inflation expectations suggest more businesses are convinced that inflation will recede. Let me talk about each of these impacts in turn. Interest-sensitive spending The first place we saw the effects of rate increases was in housing activity. When we began raising rates, Canadians with variable interest rate mortgages and 1 B. Hofmann, A. Mehrotra and D. Sandri, “Global exchange rate adjustments: drivers, impacts and policy implications,” Bank for International Settlements Bulletin No. 62 (November 2022). those looking for a new mortgage felt it first. Nearly a year later, people renewing their home loans are also facing higher interest costs. Demand for mortgages has fallen, and housing activity has weakened sharply from unsustainably high levels (Chart 2). Chart 2: Housing activity has weakened Ratio of sales to new listings, seasonally adjusted, monthly data % Source: Canadian Real Estate Association Last observation: December 2022 Higher interest rates have also affected spending on big-ticket items that people often buy on credit, such as furniture and appliances. You can really see the decline in consumption in these interest-rate-sensitive areas, but higher borrowing costs are starting to affect spending more broadly as well. Consumption growth looks to have weakened substantially in the second half of 2022 (Chart 3). Some of this slowdown reflects the waning boost from the reopening, but higher interest rates have contributed. Chart 3: Consumption is easing amid higher rates Goods and services consumption, growth over 2022H1 and 2022H2, annualized data % -3 Goods consumption Services consumption, including NPISH 2022H1 2022H2 Note: 2022Q4 is forecast. NPISH means non-profit institution serving households. Sources: Statistics Canada and Bank of Canada calculations and projections Last data plotted: 2022Q4 Demand and supply With demand slowing, we are seeing early signs that demand and supply are becoming less out of balance in our overheated economy. The output gap provides an overall measure of the balance between demand and supply. Through 2021, the economy recovered rapidly—the fastest recovery on record—and supply disruptions continued. As a result, the economy moved into excess demand in 2022, putting upward pressure on prices here in Canada. But excess demand appears to have peaked and is beginning to ease (Chart 4). Chart 4: The economy remains in excess demand Output gap, January 2023 Bank of Canada Monetary Policy Report -2 -4 -6 -8 Sources: Statistics Canada and Bank of Canada calculations Last data plotted: 2022Q4 This picture of excess demand in the economy is reflected in a wide range of labour market indicators. The unemployment rate is near historical lows, businesses continue to report widespread labour shortages, and the job vacancy rate is elevated.2 Labour markets were already tight before the pandemic, but now the unemployment rates for prime-age, young and older workers are all lower than they were before the pandemic. The unemployment rate today is also lower in every province than it was pre-pandemic. Quebec and British Columbia have the lowest unemployment rates of all. The tightness in the labour market looks to have peaked around the middle of 2022 and has eased modestly. Job vacancies have declined from that peak, and the share of firms facing labour shortages has edged down. Moreover, job growth has been slowing more in interest-rate-sensitive sectors like construction, and this has contributed to a slowing in overall employment growth (Chart 5). Chart 5: Employment growth has eased in sectors sensitive to interest rates Difference in contribution to employment growth over 2022H2 relative to 2022H1 Percentage points 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 Sensitive Moderately sensitive Sources: Statistics Canada and Bank of Canada calculations Not sensitive Last observation: December 2022 Other factors also influence the labour market—declining fertility rates and an aging population mean fewer young workers are entering the labour force and more workers are retiring. In Canada, immigration was initially hampered by the pandemic, but it is now improving along with rising labour force participation of women. We’ll be watching a broad set of indicators to gauge the balance in the labour market and how it is adjusting to tighter monetary policy. Inflation With demand moderating both globally and here in Canada, inflation has declined. Annual consumer price index (CPI) inflation eased to 6.3% in 2 See Bank of Canada, “Labour market recovery from COVID-19,” for more details. December from its peak of 8.1% in June. This is a welcome development, but inflation is still too high. So far, the decline in inflation mostly reflects lower prices for energy, particularly for gasoline. Improved global supply chains are also helping. Supply bottlenecks and backlogs lasted far longer than we expected, but they are finally resolving (Chart 6). Global shipping costs have come down, which is filtering through to lower prices for imported goods. Chart 6: Inflationary pressures from supply bottlenecks are easing GSCPI and PMI: Manufacturing suppliers’ delivery times, monthly data Index Index -2 GSCPI (left scale) China (right scale) United States (right scale) Canada (right scale) Euro area (right scale) Note: The Global Supply Chain Pressure Index (GSCPI) provides a comprehensive summary of potential supply chain disruptions that controls for demand-side factors. The Purchasing Managers’ Index (PMI) is a diffusion index of business conditions. For suppliers’ delivery times, an inverted index is used to show that a reading less than (greater than) 50 indicates an increase (decrease) in delivery times compared with the previous month. Sources: S&P Global via Haver Analytics and Federal Reserve Bank of New York Last observation: December 2022 Inflation at home is also showing signs of easing, though prices for food and many services continue to increase much too quickly. The cooling we do see in inflation is in the same areas where we see higher interest rates slowing demand. Nationally, house prices are down 13% from their peak in February 2022. Here in Québec, both the run-up and the decline in house prices have been more modest—house prices have declined 2.5% since peaking in May. Lower demand, better supply chains and lower shipping costs have brought down durable goods inflation for three months in a row. Prices for household appliances rose at a pace of just 2.8% in December, down from a 7.4% increase the month before. Overall, durable goods price inflation has fallen from 7.9% at its peak to 4.7% in December. And on a timelier three-month basis, these prices were down 3.5% in December. More broadly, we can also see that momentum in inflation has slowed. To see the underlying trends in inflation, we look at measures of core inflation that exclude the most volatile components of the CPI. Our preferred measures of core inflation have been stuck at about 5%. But timelier three-month rates have come down below 5%. That suggests core inflation will start to decline in the months ahead. Inflation expectations That brings me to inflation expectations. With inflation still high, most respondents to consumer and business surveys continue to expect that CPI inflation will be well above 2% over the next two years. But our most recent survey suggests fewer businesses now think high inflation will persist (Chart 7). A lot of uncertainty remains—the distribution of expectations is far wider than it was before the pandemic. But we’re on the right track. Chart 7: Firms’ inflation expectations have shifted lower Share of firms responding to the Business Outlook Survey with 2-year inflation expectations in each range, quarterly data % ≤1 1–2 2–3 3–4 4–5 5–6 6–7 7–8 >8 Expected rate of inflation (%) 2022Q2 2022Q4 Note: The estimates are based on firms’ responses to the Business Outlook Survey (BOS) question, “Over the next two years, what do you expect the annual rate of inflation to be, based on the consumer price index?” Buckets exclude the lower bound and include the upper bound. Sources: Bank of Canada and Bank of Canada calculations Last observation: 2022Q4 Looking ahead What comes next? At the end of January, we said that we expect to pause rate hikes while we assess the impacts of the substantial monetary policy tightening already undertaken. This is a conditional pause—it is conditional on economic developments evolving broadly in line with the outlook published in January. As I have explained, the transmission mechanism takes time—typically we don’t see the full effects of changes in our overnight rate for 18 to 24 months. That’s why policy needs to be forward looking. In other words, we shouldn’t keep raising rates until inflation is back to 2%. Instead, we need to pause rate hikes before we slow the economy and inflation too much. And that is what we are doing now. - 10 - Our assessment that it is time to pause is based on what we have seen so far and on our forecast for economic growth and inflation. We will be assessing economic developments relative to this forecast. If new evidence begins to accumulate that inflation is not declining in line with our forecast, we are prepared to raise our policy rate further. But if new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further. We expect economic growth to be close to zero for the next three quarters. With growth in demand stalled, supply will catch up and the economy will move from excess demand to modest excess supply. This will relieve inflationary pressures. We have already seen inflation in goods prices begin to fall, and we expect this to continue in the months ahead. But inflation in services prices will likely take longer to recede, partly because of high labour costs (Chart 8). There is more uncertainty about this slowing in services price inflation. Chart 8: Near-term inflation is declining for some goods but will likely remain high for services Year-over-year percentage change, monthly data % Start of forecast (January 2023) -2 Goods excluding energy and food in stores Sources: Statistics Canada and Bank of Canada calculations, estimates and projections Services excluding shelter Last data plotted: June 2023 Wage growth is currently running between 4% and 5% and appears to have plateaued within that range (Chart 9). With our survey of businesses also suggesting that inflation expectations are edging back, the risk of a wage-price spiral has diminished. Still, wage growth in that range is not consistent with getting inflation back to the 2% target unless productivity growth is surprisingly strong. We will be watching productivity, labour costs and services price inflation closely. - 11 - Chart 9: Wage growth is around 4% to 5% Wage growth measures, year-over-year percentage change, monthly data % LFS, variable-weight measure SEPH, variable-weight measure -2 LFS, fixed-weight measure SEPH, fixed-weight measure Note: LFS is the Labour Force Survey; SEPH is the Survey of Employment, Payrolls and Hours; The LFS fixed-weight measure is constructed using 2019 employment weights and is based on data released prior to January 30, 2023. Sources: Statistics Canada and Bank of Canada calculations Last observations: SEPH, November 2022; LFS, December 2022 We will also be watching to see if price-setting behaviour by businesses is normalizing. When inflation is low and stable, the competitive system works effectively. But that wasn’t happening last year when the economy overheated and inflation increased. With inflation expectations elevated and the economy in excess demand, businesses were raising their prices more frequently and by more than usual. More recently, businesses have told us that they expect their pricing behaviour will return to normal. We have already seen the distribution of price changes start to normalize, but we are still a long way from normal. (Chart 10). - 12 - Chart 10: Inflation among CPI components is normalizing but remains distorted Three-month annualized price distributions Density 0.10 0.05 0.00 −20 −10 February 2020 Note: CPI is the consumer price index. Sources: Statistics Canada and Bank of Canada calculations May 2022 December 2022 Last observation: December 2022 In summary, recent developments have reinforced our confidence that inflation is coming down. We now expect CPI inflation to fall to around 3% in the middle of this year and reach the 2% target in 2024 (Chart 11). We’ve already seen a momentum shift in goods prices. For inflation to get back to 2%, supply needs to catch up with demand and services price inflation needs to cool. Wage growth will need to moderate alongside inflation expectations, and pricing behaviour normalize. If those things don’t happen, inflation won’t come back to our 2% target, and additional monetary tightening will be required. We will be watching inflation data especially carefully to see if it is coming in broadly in line with our forecast. - 13 - Chart 11: Inflation is forecast to return to the 2% target in 2024 Year-over-year percentage change, quarterly data % Start of forecast (2023Q1) -2 1%–3% inflation control range CPI inflation Sources: Statistics Canada and Bank of Canada calculations, estimates and projections Conclusion It’s time for me to conclude. I’ve given you a picture of how monetary policy works—how our interest rate increases work their way through the economy to slow borrowing, dampen demand and ultimately lower both imported and domestic inflation. We know that the monetary policy tightening we’ve undertaken is hard on many Canadians. Unfortunately, there is no easy way to restore price stability. Monetary policy doesn’t work as quickly or painlessly as everyone would like, but it works. And it will be worth it when Canadians can once again count on low, stable and predictable inflation. As always, we will be clear and transparent. I want Canadians to understand what we’re doing to fight inflation, how it works and why it matters. I also want to be clear about the uncertainties we face—the lingering effects of a global pandemic, a war in Europe and broader geopolitical tensions. There are risks to our projection. The biggest is that global energy prices could increase, pushing inflation up around the world. We’re also concerned that inflation expectations could remain elevated and increases in labour costs could persist. If these upside risks materialize, we are prepared to raise interest rates further to return inflation to the 2% target. There are downside risks to our projection as well. Global growth could slow more sharply than we expect, and financial vulnerabilities could amplify the slowdown. Canadian households could pull back more than we expect as they adjust to higher interest rates. Overall, we view the risks around our inflation forecast as balanced. But with inflation still well above our target, we continue to be more concerned about the upside risks. - 14 - Inflation will fall in the months ahead, and we will be watching for further evidence that demand and supply are rebalancing so that inflation heads all the way back to the 2% target. We will continue to explain what we are seeing, what we are doing and what Canadians can expect from us. We are resolute in our commitment to restoring price stability for Canadians. Thank you.
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 16 February 2023.
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Tiff Macklem: Opening statement before the House of Commons Standing Committee on Finance Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 16 February 2023. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcement and the Bank's Monetary Policy Report. In January, we raised our policy interest rate by 25 basis points to 4.50%. We also said that we expect to hold the policy rate at the current level while we assess the impact of eight consecutive interest rate increases since March 2022. This is a conditional pauseit is conditional on economic developments evolving broadly in line with our forecast. Since the last time we were here with you, we've seen some evidence that our interest rate increases are starting to slow demand and rebalance our overheated economy. With inflation above 6%, we are still a long way from the 2% target. But inflation is turning the corner. Monetary policy is working. Before we take your questions, I'll outline the impact our rate increases have had so far. Then I'll explain what we expect to see this year. Finally, I will highlight some of the risks we face and how we will respond to ensure that inflation continues to come down and returns to our target. Impact so far Inflation in Canada has eased but remains high. Annual consumer price index (CPI) inflation moderated to 6.3% in December from its peak of 8.1% in June. So far, this easing mostly reflects lower prices for energy, particularly for gasoline. With global supply chains improving and demand slowing here at home for big-ticket items that people often buy on credit, price increases for durable goods have also moderated. Prices for food and many services, however, are continuing to rise much too quickly. The Canadian economy remains overheated and clearly in excess demand, and this continues to put upward pressure on many domestic prices. A broad range of labour market indicators have shown only modest signs of easing. Job vacancies have come down a little but remain elevated, the unemployment rate is near historical lows, and many businesses continue to report labour shortages. Overall, the restrictive stance of monetary policy is helping to rebalance demand and supply. Household spending is slowing, particularly for goods sensitive to interest rates like housing and furniture. More broadly, consumption growth appears to have weakened considerably in the second half of 2022. Some of this slowdown reflects the waning boost from the reopening of the economy, but higher interest rates have contributed. 1/3 BIS - Central bankers' speeches The economic outlook We know it takes time for higher interest rates to work through the economy to slow demand and reduce inflation. That's why policy needs to be forward-looking. Guided by what we have seen so far and our outlook for economic growth and inflation, we think it is time to pause interest rate hikes and assess whether monetary policy is restrictive enough to return inflation to the 2% target. If economic developments are broadly in line with our forecast and inflation comes down as predicted, then we shouldn't need to raise rates further. But if evidence begins to accumulate to show that inflation is not declining in line with our forecast, we are prepared to raise our policy rate further. In our January outlook, we expected economic growth to be close to zero for the first three quarters of the year. With growth in demand stalled, supply will catch up and the economy will move from excess demand to modest excess supply. This will relieve inflationary pressures. We expect CPI inflation to fall to around 3% in the middle of this year and reach the 2% target in 2024. We've already seen a momentum shift in goods prices. For inflation to get back to 2%, the effects of higher interest rates need to work through the economy and restrain spending enough for supply to catch up. The tightness in the labour market needs to ease, wage growth needs to moderate, and service price inflation needs to cool. Inflation expectations also need to come down and businesses return to more normal pricing behaviour. If those things don't happen, inflation will get stuck above our 2% target, and additional monetary tightening will be required. The risks ahead There are risks around our projection. Global energy prices could jump again, pushing inflation up around the world. Inflation expectations could remain elevated in Canada, or increases in labour costs could persist. Overall, we view the risks around our inflation forecast as balanced, but with inflation still well above our target, we continue to be more concerned about these upside risks. I want to leave you with a few key messages. The decline in inflation since the summer is a welcome relief for the many Canadians who are struggling to keep up with the rising cost of living. But at more than 6%, inflation remains too high. To fight inflation, the Bank of Canada responded forcefully, raising its policy interest rate from 0.25% a year ago to 4.50% today. That is working to reduce demand and rebalance the economy. We're still a long way from our inflation target, but recent developments have reinforced our confidence that inflation is coming down. And we are committed to getting inflation all the way back to 2% so Canadians can once again count on low, stable and predictable inflation and sustainable economic growth. With that overview, the Senior Deputy Governor and I would be pleased to take your questions. 2/3 BIS - Central bankers' speeches 3/3 BIS - Central bankers' speeches
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Remarks by Mr Paul Beaudry, Deputy Governor of the Bank of Canada, at the Alberta School of Business, Edmonton, Alberta, 16 February 2023.
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Remarks by Paul Beaudry Deputy Governor Alberta School of Business February 16, 2023 Edmonton, Alberta No two ways about it: Why the Bank is committed to getting back to 2% Introduction Good afternoon. Bonjour tout le monde. It is a pleasure to be here in Edmonton. We have all been going through challenging economic times recently. Almost exactly three years ago, the COVID-19 pandemic hit Canada, suddenly shutting down large parts of our economy. This upended our lives and livelihoods and created a huge disruption in financial markets. Fiscal and public health policies led the charge in tackling these dangers. The Bank of Canada played a key supporting role by reducing its policy interest rate to near zero and unblocking a financial system that was clogging up. The recession caused by the pandemic was unprecedented. Canada lost over 3 million jobs, and the unemployment rate rose to 14% in May 2020. And, as many here likely recall, oil prices even briefly turned negative. Fortunately, though, when the economy reopened after the mass closures, the rebound was also unprecedented. By the end of 2021, Canadian employment was 250,000 jobs above its pre-pandemic level, and the unemployment rate had fallen to 6%. But a storm was brewing. Supply chain bottlenecks, higher energy prices and a massive shift in global consumption patterns came together to spur inflationary pressures. The disruptions caused by the war in Ukraine only added fuel to this fire. In response, the Bank raised its policy interest rate to 4.5% in a series of rapid hikes. These interest rate increases are working. Over the past few months, inflation has started to come down. Recently it reached 6.3%, down from a peak of 8.1% last summer. This is a welcome improvement. But inflation is still too high and far from the Bank’s 2% target. At its current level, it continues to cause hardships for Canadians, especially the most vulnerable among us. While Canada may have turned the corner on inflation, we know that it will take time to get back to the Bank’s inflation target. So, I’d like to take this opportunity I would like to thank Thomas Carter, Luis Uzeda and Martín Harding for their help in preparing this speech. Not for publication before February 16, 2023 5:55 p.m. Eastern Time -2to talk about the importance of staying the course in the fight against inflation, despite the short-term pain that high interest rates can cause. First, I want to talk about the benefits of returning to the 2% inflation target. Specifically, I’ll emphasize how inflation dynamics tend to be self-stabilizing when inflation is near the target and how that helps the economy function better. I’ll also stress how low, stable inflation leads to better employment outcomes. Second, I’d like to highlight the dangers of straying from the 2% target. Here I’ll talk about how the stabilizing forces I just mentioned can turn into de-stabilizers. The high and volatile inflation that can result is troublesome for many reasons, including the fact that it makes the price system less informative. This can undermine efficiency and weaken the competitive forces that help the economy achieve its full potential. Finally, I want to place the current Canadian situation in a global context. Although most of our trading partners are also experiencing high inflation, their paths back to their own inflation targets may end up being different than ours. Should this be a concern? We’ll dive into that question. The benefits of being near the 2% target The Bank is fully committed to returning inflation to the 2% target. For three decades, this target has served Canadians well. And since it represents a sweet spot on the inflation spectrum, it remains the centrepiece of the Bank’s inflationtargeting framework. Keeping inflation stable and predictable at that low level is the best contribution monetary policy can make to the economic and financial well-being of Canadians.1 To better understand the value of a 2% inflation target, we first need to delve into some of the forces that influence firms’ price-setting behaviour. These are illustrated in Figure 1, which will serve as a roadmap for much of my talk today. Inflation dynamics are driven largely by the cost pressures that firms face. These pressures can come from both domestic and international sources. Domestic cost pressures tend to appear when the economy is in excess demand—that is, when firms face levels of demand beyond what they’re able to supply on a sustainable basis. As firms strain to meet that excess demand, they not only increase their prices but also bid up wages and the prices of other inputs as they compete with other firms for workers and materials. And since the goods produced by one firm are often inputs for other firms, this can lead to a second round of effects that further broaden and amplify domestic cost pressures. 1 In this speech, I mainly compare 2% inflation with higher rates of inflation. However, the Bank has also studied the costs and benefits of lower rates of inflation. A key takeaway from that work is that the 2% inflation target provides a reasonable buffer against the effective lower bound (ELB) on nominal interest rates. In contrast, lower rates of inflation entail a higher risk of ELB episodes. See, among others, Bank of Canada, Renewal of the Inflation-Control Target: Background Information—November 2011 (2011) and Bank of Canada, Renewal of the InflationControl Target: Background Information—October 2016 (2016). -3Of course, cost pressures can also come from international developments— things like disruptions to global supply chains and increases in the price of commodities such as oil. Figure 1 shows how these pressures impact the price-setting decisions of firms. Figure 1: Key forces governing firms’ price-setting behaviour Domestic cost pressures International cost pressures (largely via excess demand) Weak pass-through (e.g., global value chain disruptions, oil prices) Strong pass-through Firms’ price-setting decisions Inflation expectations Strong anchoring Weak anchoring Inflation target Low inflation environment Inflation outcomes High inflation environment But another key force affecting inflation is what firms expect to happen. These expectations matter because firms know that customers will ultimately judge firms’ prices in relative terms—that is, relative to the prices of other goods and services trading in the broader economy. A firm’s pricing decisions are therefore based partly on what the firm thinks its competitors will do and where it believes overall inflation is headed. Now here’s my main point. The key forces affecting inflation—that is, cost pressures and expectations—tend to behave differently based on whether inflation is high or whether the economy is operating close to a well-established and low inflation target. These differences are illustrated by the blue and red arrows in Figure 1. First, let’s focus on cost pressures. In high inflation environments, firms tend to adjust prices more frequently—otherwise, their prices would quickly fall out of -4step with their costs and the prices set by other firms.2 This makes it relatively easy for firms to quickly pass on cost changes to their customers.3, 4 In contrast, firms can make do with less frequent price adjustments when inflation is low. Rather than being passed on to customers, much of the day-to-day volatility in firms’ costs tends to be absorbed into firms’ profit margins when inflation is low. This lessens the likelihood of feedback into other firms’ costs and prices. It also helps explain why low inflation tends to go hand in hand with less volatile inflation. We can see this pattern within countries over time (Chart 1) and across countries (Chart 2). Much as with cost pressures, a self-stabilizing mechanism can take hold around expectations when inflation is close to target. When a central bank has built up a credible track record of stabilizing the economy around a low inflation target, firms tend not to pay much attention to inflation. Rather than basing their expectations on recent rates of inflation or on short-term shocks hitting the economy, they’re more inclined to settle on a simple rule of thumb that says inflation should continue to evolve in line with the central bank’s target. For a formal model in which firms find it optimal to increase the frequency of their price adjustments when trend inflation is high, see, for example, M. Dotsey, R. G. King and A. L. Wolman, “State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output,” Quarterly Journal of Economics 114, no. 2 (1999): 655–690. 3 For example, in standard New Keynesian models, the weight on firms’ marginal costs in the Phillips curve governing inflation typically increases in a structural parameter representing the frequency with which firms adjust their prices. See, for example, F. Smets and R. Wouters, “Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach,” American Economic Review 97, no. 3 (2007): 586–606. 4 For a complementary mechanism that also helps to make inflation more volatile when it’s high, see M. Harding, J. Lindé and M. Trabandt, “Understanding Post-COVID Inflation Dynamics,” Bank of Canada Staff Working Paper No. 2022-50 (December 2022). -5Chart 1: Strong positive relationship between the level and volatility of inflation within countries over time a. United States b. Canada Percentage points % 1960Q1 1970Q1 1980Q1 1990Q1 2000Q1 2010Q1 2020Q1 to to to to to to to 1969Q4 1979Q4 1989Q4 1999Q4 2009Q4 2019Q4 2022Q3 Percentage points % 1960Q1 1970Q1 1980Q1 1990Q1 2000Q1 2010Q1 2020Q1 to to to to to to to 1969Q4 1979Q4 1989Q4 1999Q4 2009Q4 2019Q4 2022Q3 Average inflation (left scale) Standard deviation of inflation (right scale) Note: Averages and standard deviations have been computed from underlying annualized quarter-over-quarter inflation rates. Sources: Organisation for Economic Co-operation and Development via Federal Reserve Economic Data and Bank of Canada calculations Last observation: 2022Q3 Chart 2: Strong positive relationship between the level and volatility of inflation across countries Standard deviation of inflation (percentage points) Decadal summary statistics Average inflation (%) 1980s 1990s 2000s 2010s Note: The sample consists of 37 advanced and emerging economies, including most of the Organisation for Economic Co-operation and Development. Averages and standard deviations have been computed from underlying monthly year-over-year percentage changes. Observations for all countries are not available for all months. Observations involving extreme inflation outcomes have been excluded (decadal average > 20%, decadal standard deviation > 10 percentage points). Dotted lines denote decade-specific lines of best fit. Each dot represents a mapping between the standard deviation of inflation and average inflation, for a given country in a given decade. Sources: Organisation for Economic Co-operation and Development Last observation: December 2019 via Haver Analytics, and Bank of Canada calculations -6As firms begin to rely on this rule of thumb, it becomes self-reinforcing. The inflation outcomes that result from the price-setting decisions of firms start falling in line with the central bank’s target, and this makes the rule of thumb even more reliable going forward. The rule of thumb therefore reduces feedback loops and helps ensure that any straying from the inflation target is relatively small and short lived. With these self-stabilizing mechanisms at work in the economy, monetary policy can pursue its inflation target with a high degree of flexibility. In an environment of low and stable inflation, the inflationary effects of shocks tend to be muted. Monetary policy can therefore look past many of these shocks and respond to others in a more measured way. This flexibility allows monetary policy not only to keep inflation low and stable but also to minimize the impacts of shocks on the labour market and the broader economy. This is a key benefit of successful inflation targeting and an important reason why the Bank is working so hard to get inflation back to 2%. The pitfalls and dangers of not returning to target For the better part of the last 30 years, Canada has benefited from the selfstabilizing mechanisms I just described.5 But these mechanisms cannot be taken for granted. In fact, they’re being tested by the series of large shocks that our economy has experienced over the past 18 months. The longer inflation stays significantly above target, the greater the risk that these mechanisms could turn from stabilizers into de-stabilizers.6 For example, mounting evidence shows that over the past two years passthrough from costs to prices has been stronger and more widespread than before the pandemic.7 As I explained earlier, that’s partly because firms tend to adjust 5 In fact, many countries around the world have benefited from these self-stabilizing mechanisms. Indeed, the harnessing of these mechanisms that occurs under credible inflation-targeting frameworks was a key contributor to the Great Moderation era in advanced economies. See, for example, D. Giannone, M. Lenza and L. Reichlin, “Explaining the Great Moderation: It Is Not the Shocks,” European Central Bank Working Paper No. 865 (February 2008) and references therein. 6 For an in-depth analysis of this risk, see Bank for International Settlements, “Part II: Inflation: a look under the hood,” Annual Economic Report (June 2022). 7 For example, before the COVID-19 pandemic, results of the Bank of Canada’s Business Outlook Survey often showed that a relatively small share of firms planned to increase their prices in the short term, while at the same time, a relatively large share of firms expected their costs to rise. This pattern is consistent with low pass-through of costs to prices. However, this pattern was broken in 2021 and 2022 when, in multiple quarters, the share of firms expecting to increase their prices was equal to or larger than the share expecting increases in costs. For details, see “Chart 9: Businesses expect growth in their input and output prices to slow,” Business Outlook Survey— Fourth Quarter of 2022 (January 2023). See also M. Amiti, S. Heise, F. Karahan and A. Sahin, “Pass-Through of Wages and Import Prices Has Increased in the Post-COVID Period,” Liberty Street Economics (blog, August 23, 2022) and R. Asghar, J. Fudurich and J. Voll, “Firms’ inflation -7prices and pass costs on to customers more frequently in high inflation environments. We’ve also seen this past year how quickly inflation can go from being a topic few people think about to one that is top of mind for many. I’ve illustrated this in Chart 3.8 Chart 3: Canadians’ attention to inflation in high and low inflation environments: suggestive evidence from threshold regressions a. Google searches for "inflation" in Canada Normalized frequency b. Newspaper articles mentioning "inflation" in Canada Share of total articles (%) Estimated threshold = 3.3% Estimated threshold = 3.4% -2 CPI inflation (year-over-year percentage change, %) -2 CPI inflation (year-over-year percentage change, %) Estimated relationships below threshold Estimated relationships above threshold Data Note: Thresholds and the relationships prevailing above and below them have been estimated using the regression methodology described in O. Korenok, D. Munro and J. Chen, “Inflation and Attention Thresholds,” working paper (September 2022). The samples begin in January 2004 for Google searches and January 2000 for newspaper mentions. Google search frequencies have been normalized to take a value of 100 at their maximum. The methodology for computing newspaper mentions is described in L. Chen and S. Houle, “Turning Words into Numbers: Measuring News Media Coverage on Shortages,” Bank of Canada Staff Discussion Paper (forthcoming). Each dot represents the mapping between the number of Google searches for the word “inflation” (panel a) or share of total articles mentioning inflation (panel b) and the level of CPI inflation, for a given month. Sources: Cision, Google Trends, Statistics Canada via Haver Analytics, and Bank of Canada calculations Last observation: December 2022 As more and more households and firms look backward and focus on recent high inflation numbers, those numbers can start to displace the inflation target as a focal point for peoples' expectations. If people start to base their expectations for inflation on the high inflation numbers they’ve been seeing lately rather than on the 2% inflation target, high inflation will become more persistent, volatile and self-perpetuating. Without a sufficiently strong policy response, a drift in expectations and price-setting behaviour in Canada: Evidence from a business survey,” Bank of Canada Staff Analytical Note (forthcoming). 8 This chart updates and extends some work by academics outside the Bank that suggests the relationship between inflation and people’s attention to it can change significantly when inflation rises above a threshold level. See O. Korenok, D. Munro and J. Chen, “Inflation and Attention Thresholds,” working paper (September 2022). -8expectations away from the Bank’s inflation target can open the door to inflation remaining high and volatile for a long period of time. As Canadians know all too well, high and volatile inflation makes it difficult for everyone to plan how to spend and invest. For example, companies find it more difficult to make key decisions for growing their business when they don’t feel confident about what their costs will be in the years ahead. And financial planning for households is also much more challenging. But the negative effects don’t stop there. Increased volatility in inflation can also be costly because it scrambles the signals from prices and makes it hard to judge whether a higher price represents a true change in costs or something else. This makes it difficult for firms and investors to allocate resources to their best uses.9 It can also impact consumer behaviour in ways that make the economy less efficient. Let me break that last point down into steps. Say inflation is stable, and for a particular good you notice a price increase that is far out of line with the rate of inflation. This leads you to shop around because you think you can find a better price elsewhere. However, when inflation becomes high and volatile, many prices in the economy start moving up together. Seeing a higher price may no longer prompt you to search for a better one because you may believe that all other prices have also increased. That’s a problem because comparison shopping encourages competition. If people don’t believe they can find a better price by shopping around, firms have more leeway to increase markups, leading to distortions that make the economy less efficient and consumers worse off.10 If inflation stays above target for a significant amount of time, then high and variable inflation will likely go hand in hand with a less efficient, more distorted economy. Of course, an inefficient economy rife with distortions makes it hard to grow overall output and employment in any kind of sustainable way. Canadians have seen this situation play out before, particularly in the 1970s and 1980s. It’s also consistent with international data—we tend to see higher unemployment in countries where inflation is more volatile (Chart 4). The takeaway then is clear. Even if inflation has declined lately, we can’t take our eyes off it too soon and let it remain significantly above target for too long. 9 See, for example, P. Beaudry, M. Caglayan and F. Schiantarelli, “Monetary Instability, the Predictability of Prices, and the Allocation of Investment: An Empirical Investigation Using U.K. Panel Data,” American Economic Review 91, no. 3 (June 2001): 648–662. 10 For a model-based demonstration of this mechanism in markets with sufficiently high search costs, see R. Bénabou and R. Gertner, “Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups?” Review of Economic Studies 60, no. 1 (January 1993): 69–93. Chart 4: Positive cross-country relationship between unemployment and the volatility of inflation Decadal summary statistics Average unemployment rate (%) Standard deviation of inflation (percentage points) 1980s 1990s 2000s 2010s Note: The sample consists of 37 advanced and emerging economies, including most of the countries in the Organisation for Economic Co-operation and Development. Averages and standard deviations have been computed from underlying monthly observations, using year-over-year percentage changes for inflation. Observations for all countries are not available for all months. Observations involving extreme inflation outcomes have been excluded (decadal average > 20%, decadal standard deviation > 10 percentage points). Dotted lines denote decade-specific lines of best fit. Each dot represents a mapping from the standard deviation of inflation to the average unemployment rate, for a given country in a given decade. Sources: Organisation for Economic Co-operation and Development Last observation: December 2019 via Haver Analytics, and Bank of Canada calculations Different paths back to normal As we work our way back to our inflation target, we need to keep another factor in mind too. Although many countries have faced similar shocks over the past few years, their experiences with high inflation have not been the same as Canada’s. Our paths back to target might differ as well. For a trading nation like Canada, what does this mean? How will the Canadian economy adjust if our inflation path is different than, say, that of our main trading partner, the United States? The answer to this question requires us to discuss another key element of the Bank’s inflation-targeting framework—Canada’s flexible exchange rate. The Bank of Canada doesn’t set the dollar’s exchange rate. We let markets set the dollar’s value according to the forces of supply and demand. Letting the Canadian dollar float in this way gives the Bank the flexibility to chart a path that’s different than the path our trading partners take. Rather than trying to maintain a particular value for the dollar, the Bank can instead focus on setting interest rates to return inflation to 2%. Suppose we enter a period during which inflation is lower in Canada than it is in one of our trading partners. Over time, this difference in inflation would create a divergence in price levels between the two economies because the price of goods in Canada would be rising more slowly than the price of goods in the other country. - 10 What happens next depends on exchange rates. Without an exchange-rate response, our relatively lower prices would be good news for Canadian competitiveness. That’s because the price of Canadian products would fall for our trading partner, making Canadian goods more appealing. Over time, however, exchange rates often adjust—sometimes slowly—in ways that offset this sort of divergence in price levels. For example, you might be familiar with the Big Mac index compiled by The Economist. As Chart 5 shows, G7 currencies have a moderate tendency to adjust in ways that help enforce a sort of “law of one price” for McDonald’s Big Macs. If the local price of a Big Mac—converted to US dollars at the prevailing exchange rate—is significantly higher than the price of a Big Mac in the United States, that gap tends to close through a nominal depreciation of the local currency over the subsequent years. Chart 5: Correlating medium-run exchange rate movements in the G7 with deviations from the law of one price (as measured by The Economist’s Big Mac index) Nominal appreciation against the US dollar over next five years (%) -10 -20 -30 -40 -30 -20 -10 Degree of overvaluation predicted by the Big Mac index (%) Note: The sample begins in 2000 and consists of data from Canada, France, Germany, Italy, Japan and the United Kingdom. The dashed line is a line of best fit. Sources: The Economist, Haver Analytics and Bank of Canada calculations Last observations: Big Mac index, January 1, 2014; exchange rates, January 1, 2019 Of course, there’s a lot of noise in this relationship, and exchange-rate movements are always difficult to predict. But, generally, either of two outcomes could emerge if Canada manages to return inflation to target sooner than our trading partners do. Neither outcome is bad. In fact, each has its own set of advantages. On the one hand, as I mentioned, lower Canadian prices could improve our competitiveness if exchange rates don’t adjust. Canadian exports would - 11 therefore be more attractive to foreign buyers, and that would be good for growth and job creation. On the other hand, if the exchange rate does adjust when prices diverge, then returning to target sooner than our partners do could lead to an appreciation of the Canadian dollar over time, all other things being equal. That would undo the competitive advantages related to exports, but it would give Canadians here at home more purchasing power for foreign goods. The bottom line is that we shouldn’t be too concerned if Canada follows a slightly different path to normalization than our counterparts. What matters most is getting all the way there. Conclusion High inflation has been painful for Canadians. And so have higher interest rates. Getting back to the Bank’s target rate of inflation will bring many benefits and help us sidestep many risks. It will allow the economy to work more efficiently and avoid the distortions that come with high and volatile inflation. This is good for households, workers, businesses and the economy as a whole. That’s why the Bank is committed to getting there. Being resolute in pursuit of this goal matters. In fact, the Bank’s resolve—and people’s awareness of it—will help Canada’s economy reach the target faster and with less pain than if the Bank is half-hearted and lets up too soon. When it comes to inflation, stability begets stability and volatility produces volatility. We can all agree that, over the past few years, we’ve had too much of the latter in our lives and not nearly enough of the former. Returning to the 2% inflation target will bring back the stability Canada has known for the past 30 years, to the benefit of all Canadians.
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Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the Manitoba Chambers of Commerce, Winnipeg, Manitoba, 9 March 2023.
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Remarks by Carolyn Rogers Senior Deputy Governor Manitoba Chambers of Commerce March 9, 2023 Winnipeg, Manitoba Economic progress report: Thinking globally, acting locally Introduction Good afternoon, and thank you to the Manitoba Chambers of Commerce and the Associates of the Asper School of Business for supporting this event and giving me the opportunity to speak with you today. And thanks to all of you for choosing to spend your lunch hour with me. It’s a particular pleasure for me to be in Winnipeg. I still consider this city—and this province—to be home. I was born here, grew up here, attended university here and started my career here. And I still have a lot of family, friends and former colleagues in Manitoba, so this feels a bit like a homecoming for me. Yesterday was International Women’s Day, and I had the opportunity to meet with an inspiring group of women leaders from across this province. Today I am looking forward to hearing from you. The Bank regularly surveys Canadian consumers and businesses as part of our work. But having the chance to hear from you directly about how your communities and businesses are navigating economic decisions day-to-day is very important to us. We know the decisions we make have a real impact on people. And I do plan to spend some time discussing the Bank’s decision yesterday to hold interest rates steady and letting you in on our thinking as we made that decision. But let’s start by setting the scene. I’ll begin with inflation because that’s what we target. We can all agree that it’s still too high. It has started to come down, but, at 5.9%, we still have a way to go to get back to our 2% target. Our monetary policy is working to do just that. Increases in our policy interest rate are starting to slow demand, giving supply time to catch up and taking some of the pressure off prices. I would like to thank Subrata Sarker and Fares Bounajm for their help in preparing this speech. Not for publication before March 9, 2023 1:40 p.m. Eastern Time -2We know that adjusting to higher interest rates has been hard for many Canadians. Our policy rate is at levels not seen for 15 years. We also know that many Canadians are asking how making their mortgage more expensive while they’re dealing with higher grocery bills will eventually lower inflation and make their lives easier. We’re also often asked how raising interest rates will solve inflation if it is primarily a global phenomenon. Since it was big global forces—surging commodity prices and major supply chain disruptions—that helped spark inflation in the first place, what can the Bank really do about it? These are good questions, and I am going to do my best to answer them today. I’ll explain how high inflation in Canada largely took root due to global factors that pushed up prices for many commodities and other goods. Then I’ll talk about how inflationary pressures spread in Canada because of strong domestic demand, in other words, an overheating economy. This is what we’ve been addressing with higher interest rates. After that, I’ll go over what we’re seeing globally and at home to put things into a broader perspective. Finally, as I mentioned, I’ll talk about what led us to our decision yesterday. How high inflation took hold in Canada Global forces Without question, one of the biggest drivers of high inflation around the world has been higher commodity prices. When the COVID-19 pandemic struck and the global economy abruptly shut down, many commodity prices plummeted— especially oil prices, but prices for natural gas, lumber and copper also fell. However, some sectors of the economy, such as housing, recovered quickly. So demand for some related commodities, such as lumber, bounced back very fast. And then, as things started to open back up, demand and prices for other commodities, such as oil and natural gas, recovered quickly too. Then, in early 2022, Russia’s invasion of Ukraine further upended the global economy. The Ukrainian diaspora in Canada is the world’s second largest, and Manitoba has the highest concentration of Ukrainian-Canadians in the country. So I know the human toll of this senseless war has been felt here. The economic impacts have also been far-reaching and damaging. By the middle of last year, global commodity prices—particularly for oil, natural gas and wheat—had surged to levels not seen since 2008, right before the global financial crisis. It didn’t take long for Canadians to feel the effects. Gasoline prices soared to well above $2 a litre last summer. And because commodities are key inputs to so many products, the impact on prices was broad-based. Higher energy prices raised the operating costs of virtually all businesses. They also raised the cost of shipping goods to customers. Food prices soared too. The war in Ukraine affected the prices of grain and fertilizer. Weather events in other parts of the world affected the supply of many crops. And disease restricted the supply of poultry and eggs. This perfect storm of factors was showing up in Canadian grocery stores by the middle of last year. -3The other main driver of high inflation around the world has been a combination of disruptions in global supply chains and a spike in demand for durable goods. Like other people around the world, many Canadians upgraded their homes during the pandemic with things like new furniture, appliances and technology. We couldn’t spend on services—like vacations and restaurants—so most of our spending, and the spending of many others around the world, was going to goods. Meanwhile, lockdowns were wreaking havoc on highly integrated global supply chains. Factories were shut down, raw materials were in short supply, and transportation backlogs piled up. The result was prices for a wide range of goods spiked. Domestic demand These three global inflationary forces—a spike in commodity prices, a surge in global demand for goods and impaired supply chains—then ran into a fourth element: an overheating economy here in Canada. Early last year, around this time, we were coming out of the Omicron wave of COVID-19 and what may turn out to be the final lockdown. The Canadian economy had become increasingly resilient over the course of the pandemic, weathering each subsequent lockdown better than the last. Canadians were anxious to catch up on the things they had missed, like travelling and eating out, so we saw some spending start to shift from goods back to services. And even though Canadian businesses had shown remarkable resilience adapting to multiple lockdowns, many struggled to keep up with the surge in demand they faced. Supply chain issues were still with us, and staff who had left or been laid off during the pandemic had to be rehired, re-trained or replaced. Our survey of businesses in the first quarter of last year found that four out of five would have trouble meeting an unexpected boost in demand—a record high.1 This pressure showed up very clearly in the labour market. The number of vacant jobs rose to nearly twice the pre-pandemic level, an obvious sign of widespread labour shortages. Labour is an important input cost for businesses, particularly in the services sector. This shortage of available workers, combined with the surge in demand for services, put upward pressure on services prices. In addition, with demand increasingly strong, many businesses began passing higher costs onto their customers. Price increases were both larger and more frequent than normal. Getting inflation under control So that’s how global and domestic forces combined to push inflation in Canada up to 40-year highs. But just as inflation rose around the world, it’s now retreating in a fairly consistent pattern. And just as they were on the way up, commodity prices have so far been a key contributor on the way down. Oil prices have declined by around 35% since last summer, mostly due to a better outlook for supply. More recently, natural gas prices have fallen sharply too—by around 60% since autumn—largely because 1 Bank of Canada, Business Outlook Survey—First Quarter of 2022 (April 2022). -4winter in the northern hemisphere has been warmer than usual. Prices for forestry, metal and agricultural commodities have also softened. Lower energy prices, in particular, are translating into lower costs for both global shipping and inputs. Global supply chains are also improving. There are fewer of the bottlenecks that made it so hard for the global supply of commodities and other goods to keep up with demand. Shipping costs and delivery times are both approaching prepandemic levels. And monetary policy is doing its job. Central banks around the world have tightened policy by raising interest rates, restraining some of the domestic factors behind inflation in different countries. That’s resulting in slower growth in global demand overall, especially for durable goods. The Bank of Canada is no exception. We raised the policy rate eight consecutive times starting in March 2022. Our higher interest rates are starting to slow growth in household spending, particularly in sectors that are sensitive to interest rates. And, overall, higher rates are helping to rebalance demand and supply.2 That being said, a broad range of labour market indicators have shown only modest signs of easing to date. Job vacancies have come down a little but are still elevated, the unemployment rate is near historical lows, and many businesses continue to report labour shortages. So what does all this mean for inflation? Well, as I said at the outset, inflation eased to 5.9% in January from a high of over 8% last summer. It’s still too high, but our most recent forecast in January has it slowing steadily to around 3% in the middle of this year and reaching the 2% target next year.3 So the inflation story here in Canada has some symmetry so far: global and domestic factors combined to drive inflation up, and both will need to retreat further to get us back down to the 2% target. Canada’s experience in a global context So far, I have talked a lot about how Canada’s experience had a good deal in common with other countries. But we can also see some differences. So let me spend a few minutes comparing where we are on a few dimensions relative to some of our counterparts.4 Our current rate of inflation, while still too high, is the second lowest in the G7 advanced economies.5 Japan’s is lower, at 4%. And momentum in inflation, 2 For a detailed account of how higher interest rates work to cool demand and bring inflation down, see T. Macklem, “Monetary policy at work” (speech delivered to CFA Québec, Québec, Quebec, February 7, 2023). 3 Bank of Canada, “Canadian economy,” Monetary Policy Report (January 2023): 23–25. 4 All data for cross-country comparisons are from the Organisation for Economic Co-operation and Development or national sources via Haver Analytics or Bloomberg. 5 The G7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States as well as the European Union. The inflation comparison is based on headline consumer price index inflation across these jurisdictions. -5as measured by the rate of change in prices over the past three months, has also been close to the bottom of the G7. It’s also important to note that services price inflation in Canada has levelled off in recent months, while it has continued to rise in some other countries. These rankings could move around a little in the coming months, of course. But they’re all rankings where being near the bottom is a good thing. Let me turn to economic performance: Canada has recorded the strongest growth in gross domestic product (GDP) in the G7 since the tightening cycle began early last year. And the International Monetary Fund expects Canada to have the strongest average GDP growth in the G7 over 2023 and 2024.6 That’s good news, but it underscores that our interest rate increases still need to work their way through the economy to ensure demand cools enough for supply to catch up. Our employment growth has also been strong compared with most of the G7. We’ve had the second-strongest recovery in jobs and hours worked since the start of the pandemic. We’ve also had the fastest adult population growth, fuelled by immigration. And our labour force participation rate for women is at the top of the G7, helped by more affordable child care and flexible work arrangements. More supply of labour is a good thing because it usually means the economy can grow more with less inflationary pressure. However, we continue to have one of the lowest rates of productivity growth in the G7. Productivity growth is a good thing for the economy because it allows businesses to pay for higher wages. If we continue to see the above-average wage growth that we’ve been seeing in Canada without stronger growth in productivity, it will be difficult to bring inflation all the way down to 2%. Households in Canada are also some of the most indebted in the G7: our household debt-to-income ratio has been on a generally upward path for the past three decades. High debt typically makes an economy more sensitive to interest rate increases. When it comes to monetary policy, Canada has had one of the most forceful tightening cycles. We were the second major central bank in the advanced economies to raise interest rates to fight inflation. And the total increase to our policy rate, 425 basis points, is second only to the US Federal Reserve’s 450 basis points. We were also the first to end quantitative easing. As well, since we began quantitative tightening, our balance sheet has contracted the fastest— by more than 20%—complementing the restrictive stance of our policy rate. As global inflationary pressures continue to recede, each country will need to chart its own course to get back to price stability. Canada, like other countries, has unique circumstances that will affect the path of the economy and inflation. But that’s the advantage of an independent monetary policy: We can get back to 6 International Monetary Fund, “World Economic Outlook Update: Inflation Peaking amid Low Growth” (Washington, DC, January 2023). -6our inflation target of 2% in a way that makes sense for us, just as other central banks are doing for them.7 Let me now turn to our decision yesterday and how these and other factors shaped the Governing Council’s thinking. Our decision yesterday As I just mentioned, we raised interest rates forcefully in response to high inflation. And, after having front-loaded our policy tightening by doing a lot in less than a year, we said in January that we expected to pause and assess the impact of those moves. Yesterday, we decided to leave the policy rate at its current level of 4.50%. We also continued our policy of quantitative tightening. It’s a conditional pause, though. If economic developments unfold as we projected and inflation comes down as quickly as we forecast in the January Monetary Policy Report (MPR), then we shouldn’t need to raise rates further. But if evidence accumulates suggesting inflation may not decline in line with our forecast, we’re prepared to do more. Looking at the data since January, Governing Council found a mixed picture. Overall, though, things are unfolding broadly in line with our outlook. We’ll need to see more evidence to fully assess whether monetary policy is restrictive enough to return inflation to 2%. For now, let me unpack recent developments and share some insight into what we discussed and how we’ll be thinking about things going forward. I’ll start with economic activity. Growth in the fourth quarter of 2022 slowed more than expected, coming in flat. With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely due to a big slowdown in inventory investment. The data did show that, in general, higher borrowing costs continue to weigh on sectors that are sensitive to interest rates, such as housing. They also showed that business investment has weakened as demand slows both in Canada and abroad. We talked a lot about the labour market. Job gains in Canada have been surprisingly strong in recent months, and the labour market remains very tight. With weak economic growth for the next couple of quarters, however, we expect that the tightness in the labour market will ease and, as it does, pressure on wages will come down. You may remember me saying if strong wage growth isn’t accompanied by strong productivity growth, it will be hard to get to 2% inflation. Well, we noted that data last week showed labour productivity in Canada fell for a third straight quarter, so productivity isn’t trending in the right direction so far. We agreed inflation is coming down largely as expected and that there has been a clear momentum shift in goods prices. But we also agreed services price 7 See P. Beaudry, “No two ways about it: Why the Bank is committed to getting back to 2%” (speech delivered to the Alberta School of Business, Edmonton, Alberta, February 16, 2023). -7inflation needs to cool further—beyond the levelling off I mentioned. And we will need to see companies return to more normal pricing behaviour. Year-over-year and three-month rates of core inflation will both need to come down more than they have for inflation to return sustainably to 2%, as will short-term inflation expectations. I spent some time earlier on the global backdrop, so let me tell you what we talked about on that front. We noted that in the United States and Europe, nearterm outlooks for growth and inflation are now somewhat higher than we expected in January. In particular, labour markets remain tight and core inflation is still high. Since these are our main trading partners, this could point to some further inflationary pressure in Canada. We also noted that a key risk to our projection—an increase in global energy prices—hasn’t materialized so far. But China’s economy is rebounding, as expected, now that it has reopened. The strength of China’s recovery and the ongoing impact of Russia’s war on Ukraine remain key sources of upside risk for commodity prices, including energy. And with inflation still well above our target, we’re still more worried about upside risks. We’ll have more to say about all of this in our April forecast. Conclusion I hope I’ve given you a sense of how global forces have influenced the growth of prices here at home and how they will continue to influence inflation going forward. Major economies around the world are highly interconnected—but while we’re always thinking globally, we have to act locally. We must tailor our policy to Canadian circumstances. And monetary policy needs to be forward-looking. We’re watching closely to see how things unfold. And we are committed to getting inflation all the way back to 2% so Canadians can once again count on low, stable and predictable inflation with sustainable economic growth. Thank you.
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Remarks by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, at the National Bank Financial Services Conference, Montreal, Quebec, 29 March 2023.
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Category/Catégorie: Protected B/Protégé B Remarks by Toni Gravelle Deputy Governor National Bank Financial Services Conference March 29, 2023 Montréal, Quebec PROTECTED B The Bank of Canada’s market liquidity programs: Lessons from a pandemic Introduction Good afternoon. Thank you for inviting me to talk about some of the actions the Bank of Canada took at the outset of the COVID-19 pandemic to keep markets liquid and functioning. That’s what you’ve been promised, and it’s what I plan to do today. But I would be remiss in a speech about market liquidity if I didn’t speak first about recent turmoil in the banking system in the United States and overseas. So let me start with a few words from our perspective. The recent global banking stresses In the United States, the collapse of Silicon Valley Bank and Signature Bank on the same weekend revealed how the combination of a large and concentrated uninsured depositor base and falling asset values can lead to bank runs. US authorities have responded by taking control of both banks and offering extraordinary support to their depositors. And the Federal Reserve stepped in with a new term funding facility for banks requiring liquidity support. Shortly thereafter, Credit Suisse came under severe market pressure, and the Swiss authorities facilitated its takeover by UBS, ensuring continuity of operations for Credit Suisse’s clients and financial counterparties. While these events introduced some degree of stress in the financial system, markets are functioning. Global banks are more resilient today than they were 15 years ago, at the outset of the global financial crisis. With the reforms put in place since then, global banks are required to have substantially increased their capital and liquidity buffers, making the system safer and better able to withstand stress. I would like to thank Grahame Johnson for his help in preparing this speech. Not for publication before March 29, 2023 12:30 pm Eastern Time -2Category/Catégorie: Protected B/Protégé B In Canada, our banking system has a well-earned international reputation for stability. This reflects structure of our banking system, together with sound risk management in our financial institutions and robust regulation and supervision. Canadian banks weathered the global financial crisis well, and, since then, their resilience has been further strengthened with the implementation of new, higher global standards. But we know we’re not immune to spillovers from what’s happening elsewhere. The financial system is highly globally integrated, so when financial stresses arise outside of Canada, they can negatively affect things here at home. The Bank’s mandate to promote the stability of the financial system means that we’re ready to act in the event of severe market-wide stress and provide liquidity support to the financial system. We did so during the 2008–09 global financial crisis, and we did so again during the critical market disruptions that occurred at the outset of the COVID-19 pandemic. And just as we adjusted our extraordinary liquidity facilities based on the lessons learned from our interventions through the global financial crisis, the review of our pandemic-related interventions will allow us to further improve and better target our responses in the event of market turmoil in the future. So let me now turn to the topic at hand: the lessons of the COVID-19 pandemic and what you can expect from us if we were to face severe financial system stress again. Actions during COVID-19 As we all remember, almost exactly three years ago the rapid spread of a new virus brought the world to a screeching halt. Large parts of the economy shut down, and global financial markets experienced unprecedented disruption. This led to a sense of panic both on Main Street, where businesses and households worried that they could be without income for months, and on Bay Street, where market participants faced sharply rising financial risks. With everyone fearing an economic and financial calamity, a dash-for-cash mentality took hold. In financial markets, this caused severe and widespread market dysfunction and distortions. Participants of all stripes were looking for greater liquidity and sold off debt securities in large volumes.1 Market liquidity across all fixed-income markets almost completely dried up overnight. 2 So the Bank stepped in quickly and forcefully with a number of programs to restore market functioning. 1 While many market participants sought to hold more cash for precautionary reasons, several also faced sharply higher margin requirements, leading to heightened demand for cash. Managers of fixed-income mutual funds faced higher redemption flows, which also drove some of the selling of debt securities. And banks faced significantly higher draws on business lines of credit, as corporate clients drew on them as a precaution to the economy shutting down. 2 See J.-S. Fontaine, C. Garriott, J. Johal, J. Lee and A. Uthemann, “COVID-19 Crisis: Lessons Learned for Future Policy Research,” Bank of Canada Staff Discussion Paper No. 2021-2 (February 2021). -3Category/Catégorie: Protected B/Protégé B We intervened aggressively across a range of markets, launching 10 liquidity facilities and asset purchase programs—9 of which were new to us. And we did so in the span of about a month. We have recently reviewed the effectiveness of the programs we rolled out. In fact, we’ve just published a paper with our findings, with another forthcoming. 3 While I’m not going to go through the entirety of our analysis here today, I’d like to take some time now to discuss the two largest programs in particular: the extended term repo operations and the Government of Canada Bond Purchase Program (GBPP). Extended term repo operations Term repo is our workhorse liquidity facility, and we came into the pandemic with a well-developed playbook for this program. Let me explain in a bit more detail. In times of relative market stability, our regular term repo operations are aimed at managing our balance sheet. In times of crisis—like the market stresses brought on by a global pandemic—we use extended term repo operations to support market functioning. Our go-to game plan to relieve severe market dysfunction focuses on providing collateralized lending in the form of repos to banks. We then rely on the banks to pass this funding into the broader financial system—including to institutional asset managers, who are active in and rely on repo funding markets. 4 We must also remember that these banks play an active role as market makers in a range of securities—including Government of Canada (GoC) bonds. So, by easing access to funding, our extended term repos also helped support both active trading in these securities, along with market functioning more generally. In times of crisis, extended term repos are held more often and for larger sizes than our regular term repos. And if a market-wide stress event is severe, the length of their maturities can also be expanded. Through these extended term repos, we lent roughly $210 billion to financial institutions from March to June 2020. We also relaxed the restrictions on collateral eligibility to ensure these actions would have their intended effect. This reflected the unprecedented and severe nature of the market-wide dysfunction at the outset of the pandemic and helped stave off some of the pandemic’s worst financial effects. Government of Canada Bond Purchase Program outcomes In contrast to our term repo program, the GBPP was entirely new to us in 2020. 3 See G. Johnson, “A Review of the Bank of Canada’s Market Operations Related to COVID-19,” Bank of Canada Staff Discussion Paper No. 2023-6 (March 2023). 4 The Standing Term Liquidity Facility (STLF) is also available to federally or provincially prudentially regulated members of Payments Canada for which the Bank of Canada has no concern about their financial soundness. For more on the STLF and extended term repos, see our Framework for market operations and liquidity provision. -4Category/Catégorie: Protected B/Protégé B During the pandemic we used the GBPP in two distinct ways: first as a market functioning tool and then later as a monetary policy tool. I’ll focus most of my discussion on how we used the GBPP to improve market functioning. To set the stage, let’s remember that it is very unusual for GoC securities markets to seize up in periods of financial stress. During the global financial crisis—as in most market-wide liquidity stress events—a flight-to-quality mindset took hold and market participants rushed to buy GoC bonds. These bonds become a safe-haven investment; prices may move sharply, but in general there are no system-wide strains emanating from this market. But the early days of the pandemic presented such severe and unique financial stress that investors were aggressively selling even GoC bonds, with no buyers stepping in. Market liquidity had completely evaporated. This is why the Bank used the GBPP as a market function tool at the onset of the pandemic. Any future use of a GBPP would reflect what we learned from this experience. Let me go over some of those lessons. First, we would be clear from the outset when we are purchasing GoC bonds strictly to restore market functioning. There should be no ambiguity. We would be very clear that the GBPP is targeting market functioning and is distinct from—and not intended as—monetary policy. If we are not crystal clear in our market functioning objective, it could lead to speculation over other monetary policy actions. This is particularly important at times when the Bank is actively tightening monetary policy. Second, the program’s scale and scope would be graduated and tied to market conditions. And much like with our extended term repo operations, the purchase program would be temporary, running for a pre-set and relatively short period of time. Third, given that the purchases are aimed at healing market dysfunction, we would look to purchase GoC bonds at something like backstop pricing. This means we would not be trying to raise bond prices and push down yields. Rather, we would purchase them at prices—and in amounts—that encourage private sector participants to return to the market. This approach would help mitigate moral hazard. And I’ll come back to moral hazard in a moment. Finally, once conditions improved and market functioning returned to normal, we would sell the GoC bonds we had purchased. By selling those bonds soon after market functioning normalized, we would be able to get our balance sheet back to its pre-event size relatively quickly. This would minimize any unintended impact on monetary policy. These are some of the lessons we’re taking away from the use of this extraordinary program during the pandemic. And I want to be clear that the bar is very high for us to use large-scale GoC bond purchases to support market functioning again. There are a few reasons for this. As I noted a moment ago, we expect our standard emergency lending operations—like the extended term repo—to do the trick in terms of easing bond market liquidity issues in most cases. When we lend large amounts of liquidity to -5Category/Catégorie: Protected B/Protégé B banks through term repos, they seek to pass on much of this liquidity to the broader financial system. However, there is a view that this broader, non-bank financial intermediary sector has grown so large that this on-lending alone would not be enough to prevent market liquidity in GoC bond trading from drying up. In this case, there would be a need for the Bank to step in. To this, I would like to point out our Contingent Term Repo Facility (CTRF). This facility allows us to provide liquidity directly beyond the Bank of Canada’s traditional bank counterparties to asset managers—including pension funds. 5 This would be invaluable if we were ever faced with an event like the pension fund–related stresses in the UK gilt market in autumn 2022. If a similar situation were to arise in Canada, the CTRF could serve to reduce the need for the Bank to conduct outright bond purchases because pension funds would have access to the liquidity they need to meet margin calls. However, if we were faced with another extreme event that caused severe dysfunction in the GoC bond market—and for which our other emergency tools were not working—we may well be in a “break-the-glass” situation. In this case, we may resort to large-scale GoC bond purchases to restore market functioning. That covers the market-functioning angle of the GBPP. Mitigating moral hazard Before I move on to the monetary policy aspect of our GBPP, I want to talk about an important concept around the unprecedented actions the Bank took over the past three years: moral hazard. Moral hazard emerges when investors or market players feel they can take unusual risks without bearing the consequences if things go wrong. In other words, they come to expect that since the central bank stepped in once, it will step in again—at any sign of market stress, even a modest one. Moral hazard is something we take very seriously. So if we need to step in again, we will—as we always do—have an eye to mitigating moral hazard. First, we will be offering extraordinary liquidity like we did in the pandemic only in extreme market-wide situations, when the entire financial system faces funding constraints. Second, as I touched upon earlier, penalty pricing should be built into our extraordinary actions whenever possible to make the program unattractive once financial conditions improve. And third, when penalty pricing is not possible, we will ensure that our programs are appropriately structured, both in terms of size and duration. We will set a pre- 5 The Bank of Canada carries out market operations with a designated set of primary dealers. For the CTRF, the eligible list of counterparties includes not only these primary dealers but also other financial intermediaries and asset managers. The latter two groups must nonetheless meet certain eligibility requirements. -6Category/Catégorie: Protected B/Protégé B determined expiry date—say, one to three months—to make clear the actions are temporary. When the program expires, we could decide to renew it, recalibrate it or let it wind down. We are also considering using indicators as triggers to wind down some programs, potentially even before their pre-set expiry date. These triggers could be based on either price or activity and would be set at a threshold that suggests the specific market is once again functioning properly. Now I’ll shift over to the monetary policy aspects of our GBPP. From market functioning to monetary policy In summer 2020, after markets had recovered from the initial shock, we announced a shift in the focus of the GBPP to a monetary policy function. Most of you know this as quantitative easing (QE). Its purpose is to help the Bank achieve its 2% inflation target when inflation is below target or negative and our policy rate is already as low as it can go. How does this work? Well, when our policy interest rate is at the effective lower bound of 25 basis points, QE helps lower interest rates out along the yield curve. These lower interest rates support lending to households and businesses as well as economic growth more generally. We have more work to do to fully assess the use of the GBPP as a monetary policy tool during the pandemic. While this work is ongoing, we have identified a few lessons learned so far. In retrospect, we should have explained the shift in the program’s objective more clearly to the public and market participants. In future times of crisis, we will avoid this issue by clearly distinguishing between asset purchases for market functioning and those for monetary policy. As well, the transition from market functioning to monetary policy would likely be a good time to consider recalibrating the scope of the program and to modify its structure and scale. QE is something that has only been used once in our history—during the pandemic. In the future, we may once again face a macroeconomic situation where our policy rate is at the effective lower bound. In this type of exceptional circumstance, we may need to use our extended tool kit to provide additional monetary policy stimulus. Moving forward with quantitative tightening This brings us to the present day, so I’ll turn now to something more current. The monetary policy actions we took during the pandemic boosted the GoC bond holdings on our balance sheet to roughly $440 billion at its peak. We are now working to normalize our balance sheet through our quantitative tightening (QT) program. And when we began QT roughly a year ago, we also said we had decided to implement monetary policy using a floor system—or an ample reserve system— -7Category/Catégorie: Protected B/Protégé B on a permanent basis.6 It is important to understand that the amount of settlement balances—or reserves—needed to operate in a floor system is somewhat above the long-term level demanded by the banking sector. 7 Some of you may be wondering what that ideal level might be. The answer is not yet set in stone. We know it will be well below our current level of roughly $200 billion. Our best estimate is somewhere in the range of $20 billion to $60 billion, or roughly 1% to 2% of Canadian gross domestic product (GDP). By comparison, the US Federal Reserve’s longer-run level of reserves needed has recently been estimated to be roughly 10% to 13% of US GDP. 8 This implies that QT will have run its course once our settlement balances have reached this $20 billion to $60 billion range. At that point, the Bank would start buying assets again as part of our regular balance sheet management process. 9 Given that a great deal of uncertainty surrounds our estimate for the long-run level of reserves needed, we will be monitoring short-term funding conditions as our settlement balances decline. And based on what we see, we may have to revise our estimate of the level needed for us to implement monetary policy under a floor system. For example, if we were to see persistent upward pressure on the overnight repo rates in the market before settlement balances reached our estimate of the steady-state level, it could very well mean our estimate for the range was too low. As for the question of when QT will end, this will likely occur sometime around the end of 2024 or the first half of 2025. This is based on the maturity structure of our current bond holdings combined with the estimate of what our steady-state holdings will likely be. The timing may shift slightly as the size of other parts of our balance sheet— including government deposits and currency in circulation—changes over time. It’s important to remember we are still working to bring aggregate supply and demand back into balance. Our main tool for doing this is our policy interest rate, which we have increased forcefully—from 0.25% to 4.50% in less than a year. But our balance sheet must continue to normalize to remove the support it provides to monetary policy. 6 See Bank of Canada, “Bank of Canada provides operational detail for quantitative tightening and announces that it will continue to implement monetary policy using a floor system,” (Market Notice, April 13, 2022). 7 T. Gravelle, R. Morrow and J. Witmer, “Reviewing Canada’s Monetary Policy Implementation System: Does the Evolving Environment Support Maintaining a Floor System?” Bank of Canada Staff Discussion Paper (forthcoming). 8 See D. Lopez-Salido and A. Vissing-Jorgenson, “Reserve Demand and Quantitative Tightening,” Federal Reserve Board (November 2022). 9 This is to say that, in ordinary times, we routinely buy assets to offset the ongoing growth of currency in circulation. More specifically, once we are at the steady-state level, we will start buying GoC bonds and treasury bills again. We will also resume our regular term repo operations. -8Category/Catégorie: Protected B/Protégé B Quantitative tightening is happening, but it will take time to run its course. Conclusion It’s time for me to wrap up. The COVID-19 pandemic was certainly unprecedented, and it merited a strong response from the Bank. Let me re-emphasize that this level and type of intervention should not be expected with every episode of market turbulence in the future. We will do some things differently next time if the need arises. This includes putting in place measures to further mitigate moral hazard. After the global financial crisis, we learned a lot by carefully reviewing the effectiveness of our response. That work helped inform our response to the pandemic, just as the work we are doing now will help us respond better to future crises. And it’s important that we remain nimble in response to the uncertain times we’re in. In the past month alone we’ve seen important developments—headline inflation has dropped, and the risk appetite in global markets has pulled back, partly reflecting the increased stress in global banking that I noted at the beginning of my speech. At the same time, the labour market in Canada remains tight and this is putting upward pressure on many services prices. We continue to expect consumer price index (CPI) inflation to come down in the months ahead, but we will need to see further slowing in core inflation to get CPI inflation back to the 2% target. We are also keeping a close eye on stresses to global banking systems as we turn our attention to the April Monetary Policy Report. We will consider the macroeconomic impact of this evolving situation as we put together our next projection. We’ll be looking specifically at potential spillovers into the real economy to the extent that financial conditions tighten and there are broader confidence effects. To conclude, we will continue learning from our actions and making improvements to our market liquidity frameworks in support of Canadians’ economic and financial wellbeing. And it’s crucial that we keep you informed of those lessons along the way. Thank you.
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 12 April 2023.
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Tiff Macklem: Release of the Monetary Policy Report Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 12 April 2023. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's policy announcement and the Bank of Canada's Monetary Policy Report (MPR). Today, we maintained the policy rate at 4½%. We are also continuing our policy of quantitative tightening. We are encouraged that inflation is declining, and we are seized with the importance of staying the course and restoring price stability for Canadians. Inflation is coming down quickly and is forecast to be around 3% this summer. The economy is expected to grow modestly even as inflation comes down. This is good news, but it is not job done. Our destination is the 2% inflation target, and several things still have to happen to get inflation all the way back to target. Inflation expectations have to come down further, services price inflation and wage growth need to moderate, and corporate pricing behaviour has to normalize. We are focused on these indicators, and the evolution of core inflation, to ensure that consumer price index (CPI) inflation continues to progress toward the target. The work of monetary policy-the full impact of the policy rate increases we've undertaken so far-is not done. We will be assessing economic developments and the effects of past interest rate increases relative to our inflation forecast. If monetary policy is not restrictive enough to get us all the way back to the 2% target, we are prepared to raise the policy rate further to get there. Before I elaborate on these considerations, let me give you some economic and financial context for the decision. Since we last updated our economic projection in January, global growth has been stronger than we expected. But while growth in the United States and Europe has surprised us on the upside, economic activity will likely slow further as successive interest rate increases work their way through the economy. Recent stress in the global banking sector has also tightened credit conditions, which will contribute to weaker global growth. Overall, the Bank estimates the global economy will grow by 2.6% this year, 2.1% in 2024 and 2.8% in 2025. In Canada, the economy remains in excess demand. Gross domestic product (GDP) growth in the first quarter of the year appears stronger than we projected in January, 1/3 BIS - Central bankers' speeches supported by a bounce in exports and solid consumer spending. The labour market is still tight. The unemployment rate, at 5%, remains near its record low, and wages continue to grow in the 4% to 5% range. Employment growth has been surprisingly strong, reflecting continued demand and increases in labour supply, as more women have joined the workforce and immigration has increased. Respondents to the Bank's Business Outlook Survey say it's becoming easier to find the workers they need, which suggests that the tightness in the labour market is beginning to ease. Past policy rate increases are working their way through the economy and restraining demand. Higher interest rates are slowing household spending, particularly on big-ticket items. As mortgages are renewed at higher rates, more households will feel the restraining effects of monetary policy. Business investment is also expected to soften in the year ahead, dampened by weaker demand for Canadian exports and higher financing costs. Taking these forces into consideration, we expect Canadian GDP growth to be weak for the rest of this year before beginning to pick up gradually in 2024 and through 2025. On an annual average basis, this suggests growth will slow from 3.4% last year to about 1.4% this year and 1.3% in 2024, and then pick up to 2.5% in 2025. This outlook is slightly stronger than our previous projection for 2023, but slightly weaker for 2024. What does all of that mean for inflation? I know many Canadians are still struggling to manage the rising cost of living, and at more than 5%, inflation is still too high. But we've come a long way from the 8.1% inflation we saw last summer, and we see further declines ahead. Annual CPI inflation declined to 5.2% in February, led by falling goods price inflation, which reflects lower energy prices, normalizing supply chains and the effects of restrictive monetary policy on interest-rate-sensitive sectors. The more timely three-month rate of inflation has fallen to 1.6%, suggesting headline inflation will continue to ease in coming months. But price pressures for many things Canadians need to buy are still too high. Food price inflation is still above 10%. We expect that to decline in the months ahead because production and distribution costs have eased. Services price inflation also remains high and is expected to decline only gradually. Continued strong demand for services and the still-tight labour market are putting upward pressure on many services prices. As the economy slows and the labour market comes into better balance, we expect to see services price inflation decelerate and measures of core inflation decline further. The Bank's preferred measures of core inflation have eased slightly to just below 5%. With three-month rates of core inflation still running about 3½%, we will need to see further easing to get headline inflation sustainably back to the 2% target. This will take some time. We do not expect inflation to get all the way back to the 2% target until the end of 2024. Governing Council discussed whether we've raised rates enough and we considered the likelihood that the policy rate may need to remain restrictive for longer to return inflation to the 2% target. With these considerations in mind, Governing Council judged it appropriate to hold rates steady while we continue to assess whether monetary policy is sufficiently restrictive to return inflation to target. Monetary policy works with a lag, and we 2/3 BIS - Central bankers' speeches recognize that the effects of the tightening have not yet fully worked their way through the economy. Governing Council also discussed the risks around our projection. The biggest upside risk is one I just mentioned-that services price inflation could be stickier than projected. If the labour market remains tight and companies believe they can continue to pass on higher costs without restraint because consumers expect higher prices, then getting inflation back to target will be more difficult. The key downside risk is a global recession. If global banking stress re-emerges, credit conditions could tighten significantly, resulting in a more severe global slowdown and much lower commodity prices. Overall, we view the risks around our inflation forecast to be roughly balanced, but with inflation still well above our target, we continue to be more concerned about the upside risks. Let me conclude. Our job at the Bank of Canada is to get inflation all the way back to the 2% target. We are encouraged with the progress so far. And getting inflation down to 3% this summer will be welcome relief for Canadians. But let me assure Canadians that we know our job is not done until we restore price stability. That means inflation that is centred on our 2% target. Price stability is important because it restores the competitive forces in the economy and allows Canadians to plan and invest with confidence that their money will hold its value. That's the destination-we are on our way and we will stay the course. With that summary, the Senior Deputy Governor and I would be pleased to take your questions. 3/3 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 18 April 2023.
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Tiff Macklem: Opening statement before the House of Commons Standing Committee on Finance Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 18 April 2023. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcement and the Bank of Canada's Monetary Policy Report (MPR). Last week, we maintained the policy rate at 4½% as we continue to assess whether monetary policy is restrictive enough to return inflation to our 2% target. Since the last time we were here with you, we've seen a steady improvement in inflation and modest economic growth. Inflation is coming down quickly-data this morning show it fell to 4.3% in March. And we forecast it to be around 3% this summer. We are encouraged by that, but we are also seized with the importance of staying the course and restoring price stability for Canadians. Several things still have to happen to get inflation all the way back to the 2% target. Inflation expectations have to come down further, services price inflation and wage growth need to moderate, and corporate pricing behaviour has to normalize. We are focused on these indicators, and the evolution of core inflation, to ensure that consumer price index (CPI) inflation continues to progress toward the target. If monetary policy is not restrictive enough to get us all the way back to the 2% target, we are prepared to raise the policy rate further to get there. Before I take your questions, let me give you some economic and financial context for the decision. The Canadian economy remains in excess demand. Gross domestic product (GDP) growth in the first quarter of the year appears stronger than we projected in January, and the labour market is still tight. The unemployment rate, at 5%, remains near its record low, and wages continue to grow in the 4% to 5% range. Employment growth has been surprisingly strong, reflecting continued demand and increases in labour supply. Past policy rate increases are working their way through the economy and restraining demand. Households are slowing their spending, particularly on big-ticket items. As mortgages are renewed at higher rates, more households will feel the restraining effects of monetary policy. Taking these forces into consideration, we expect Canadian GDP growth to be weak for the rest of this year before beginning to pick up gradually in 2024 and through 2025. What does all of that mean for inflation? We've come a long way from the 8.1% inflation we saw last summer. As I mentioned, annual CPI inflation was down to 4.3% in March, 1/2 BIS - Central bankers' speeches led by falling goods price inflation, and we see further declines ahead. That's good news. But many Canadians are still struggling to manage the rising cost of living, and prices of many things that people need to buy are still rising too quickly. Food price inflation is just under 10%. We expect food price inflation to come down in the months ahead, but services price inflation will take longer. Continued strong demand and the tight labour market are putting upward pressure on many services prices, and those are expected to decline only gradually. We expect it will take until the end of 2024 to get inflation all the way back to the 2% target. When we met last week, the Bank's Governing Council discussed whether we've raised rates enough, and we considered the likelihood that the policy rate may need to remain restrictive for longer to return inflation to the 2% target. Governing Council also discussed the risks around our projection. The biggest upside risk is one I just mentioned-that services price inflation could be stickier than projected. The key downside risk is a global recession. If global banking stress re-emerges, we could be facing a more severe global slowdown and much lower commodity prices. Overall, we view the risks around our inflation forecast to be roughly balanced, but with inflation still well above our target, we continue to be more concerned about the upside risks. Let me conclude. Our job at the Bank of Canada is to get inflation all the way back to the 2% target. We are encouraged with the progress so far. And seeing inflation get down to 3% this summer will be welcome relief for Canadians. But let me assure Canadians that we know our job is not done until we restore price stability. Price stability is important because it restores the competitive forces in the economy and allows Canadians to plan and invest with the confidence that their money will hold its value. That's the destination-we are on our way and we will stay the course. With that summary, the Senior Deputy Governor and I would be pleased to take your questions. 2/2 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the Standing Senate Committee on Banking, Commerce and the Economy, Ottawa, Ontario, 20 April 2023.
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Tiff Macklem: Opening statement before the Standing Senate Committee on Banking, Commerce and the Economy Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the Standing Senate Committee on Banking, Commerce and the Economy, Ottawa, Ontario, 20 April 2023. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcement and the Bank of Canada's Monetary Policy Report (MPR). Last week, we maintained the policy rate at 4½% as we continue to assess whether monetary policy is restrictive enough to return inflation to our 2% target. Since the last time we were here with you, we've seen a steady improvement in inflation and modest economic growth. Inflation is coming down quickly-data this week show it fell to 4.3% in March. And we forecast it to be around 3% this summer. We are encouraged by that, but we are also seized with the importance of staying the course and restoring price stability for Canadians. Several things still have to happen to get inflation all the way back to the 2% target. Inflation expectations have to come down further, services price inflation and wage growth need to moderate, and corporate pricing behaviour has to normalize. We are focused on these indicators, and the evolution of core inflation, to ensure that consumer price index (CPI) inflation continues to progress toward the target. If monetary policy is not restrictive enough to get us all the way back to the 2% target, we are prepared to raise the policy rate further to get there. Before I take your questions, let me give you some economic and financial context for the decision. The Canadian economy remains in excess demand. Gross domestic product (GDP) growth in the first quarter of the year appears stronger than we projected in January, and the labour market is still tight. The unemployment rate, at 5%, remains near its record low, and wages continue to grow in the 4% to 5% range. Employment growth has been surprisingly strong, reflecting continued demand and increases in labour supply. Past policy rate increases are working their way through the economy and restraining demand. Households are slowing their spending, particularly on big-ticket items. As mortgages are renewed at higher rates, more households will feel the restraining effects of monetary policy. Taking these forces into consideration, we expect Canadian GDP growth to be weak for the rest of this year before beginning to pick up gradually in 2024 and through 2025. 1/2 BIS - Central bankers' speeches What does all of that mean for inflation? We've come a long way from the 8.1% inflation we saw last summer. As I mentioned, annual CPI inflation was down to 4.3% in March, led by falling goods price inflation, and we see further declines ahead. That's good news. But many Canadians are still struggling to manage the rising cost of living, and prices of many things that people need to buy are still rising too quickly. Food price inflation is just under 10%. We expect food price inflation to come down in the months ahead, but services price inflation will take longer. Continued strong demand and the tight labour market are putting upward pressure on many services prices, and those are expected to decline only gradually. We expect it will take until the end of 2024 to get inflation all the way back to the 2% target. When we met last week, the Bank's Governing Council discussed whether we've raised rates enough, and we considered the likelihood that the policy rate may need to remain restrictive for longer to return inflation to the 2% target. Governing Council also discussed the risks around our projection. The biggest upside risk is one I just mentioned-that services price inflation could be stickier than projected. The key downside risk is a global recession. If global banking stress re-emerges, we could be facing a more severe global slowdown and much lower commodity prices. Overall, we view the risks around our inflation forecast to be roughly balanced, but with inflation still well above our target, we continue to be more concerned about the upside risks. Let me conclude. Our job at the Bank of Canada is to get inflation all the way back to the 2% target. We are encouraged with the progress so far. And seeing inflation get down to 3% this summer will be welcome relief for Canadians. But let me assure Canadians that we know our job is not done until we restore price stability. Price stability is important because it restores the competitive forces in the economy and allows Canadians to plan and invest with the confidence that their money will hold its value. That's the destination-we are on our way and we will stay the course. With that summary, the Senior Deputy Governor and I would be pleased to take your questions. 2/2 BIS - Central bankers' speeches
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Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Toronto Region Board of Trade, Toronto, Ontario, 4 May 2023.
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Tiff Macklem: Staying the course to price stability Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Toronto Region Board of Trade, Toronto, Ontario, 4 May 2023. *** Introduction Good afternoon. I want to thank the Toronto Region Board of Trade for inviting me to speak today. I can't think of a better audience to speak with about price and financial stability, and I very much look forward to our discussion. The Bank of Canada began raising interest rates in March of last year, and 14 months later we can see that monetary policy is working to bring inflation down. In March of this year, consumer price index (CPI) inflation was 4.3%-or roughly half of what it was last summer when it peaked at just over 8%. We expect inflation to decline further to about 3% this summer. This is good news. But I'm not here to talk to you about the journey from 8% to 4% or even 3%. I'm here to talk about staying the course to price stability and getting the rest of the way back to the 2% target. Monetary policy still has work to do. I want to talk to you about the challenges and risks in the journey back to target. I also want to discuss the recent stress we've seen in the global banking sector and how financial stability and price stability reinforce each other. Restoring price stability Early in the COVID-19 pandemic, inflation in Canada was sparked by global forces, including supply chain disruptions and a spike in global demand for goods. Russia's invasion of Ukraine last year drove inflation even higher, particularly for energy and agricultural commodities. But domestic forces have increasingly contributed to inflationary pressures. The Canadian economy began overheating as the economy fully reopened. People still wanted to buy goods, and demand for services soared as households tried to catch up on the many services they had missed out on through the pandemic. Employers could not find enough workers to keep up, and businesses were quick to pass on increased costs to consumers. The Bank responded forcefully to these inflationary pressures, raising our policy interest rate quickly. We did this to rebalance the economy-to lower demand and give supply a chance to catch up. This tighter monetary policy is working. Demand for goods is slowing because higher interest rates are restraining household spending. And the supply of goods is improving as global bottlenecks ease and lower energy prices reduce shipping and production costs. As a result, inflation is coming down quickly. We expect it will hit 3% this summer, even as the economy continues to grow modestly. We are encouraged by this progress, but we expect that getting inflation from 3% back to the 2% target is going to be more difficult. Our current projection has that happening only by the end of 2024. 1/5 BIS - Central bankers' speeches In this context, I want to be clear: our job is not done until we restore price stability-in other words, until inflation is centred on our 2% target. Price stability is important because it is a key ingredient to a prosperous economy. Low and stable inflation strengthens the competitive forces in the economy and allows Canadians to plan and invest with confidence that their money will hold its value. As we outlined in April, the biggest upside risk to our inflation forecast is that services price inflation could be more persistent than we expect. For services price inflation to slow enough for overall inflation to get back to the 2% target, several things still need to happen: the labour market needs to rebalance, corporate pricing behaviour needs to normalize, and near-term inflation expectations need to come down further. Let me take each of these in turn. Labour market The Canadian labour market is still tight. The unemployment rate, at 5%, remains near a record low, and employment growth in recent months has been stronger than expected. But labour supply has also been growing faster than anticipated as more women and immigrants join the workforce. Increases in child care subsidies and more flexible work arrangements are improving the labour force participation of women, particularly mothers with young children. More people coming to Canada are also augmenting the labour force. The Canadian population hit 39.6 million in January, after a record gain of one million newcomers in 2022. These newcomers include permanent residents, temporary foreign workers and international students. They are adding to demand in the economy, and many are new workers increasing labour supply. The increased labour supply is helping ease pressures in the labour market by filling job vacancies. And we are seeing some evidence that labour shortages are beginning to wane. Results from the Business Outlook Survey (BOS) for the first quarter of 2023 show that firms were beginning to find it easier to hire workers. But the strong demand for labour is still quickly absorbing the increased supply, and wage growth has yet to moderate. Most wage growth measures remain around the 4% to 5% range. Unless productivity growth surprises us with a strong increase, persistent wage growth in that range will make it difficult to achieve the 2% inflation target. The tight labour market matters a lot for the services sector: about one-third of the price of non-shelter services reflects labour costs, compared with one-fifth in the goodsproducing sectors. Corporate price-setting behaviour The BOS also provides insight into corporate pricing behaviour. Businesses report they are still worried about their costs and are still dealing with high demand for many goods and services. They tell us that they still expect to change prices more frequently than normal over the next 12 months. But the dynamics may be starting to change. Businesses say that they expect prices will grow more slowly as commodity prices fall, supply chains improve and demand softens. They also say that they expect the size and pace of price changes to decline, which suggests their price-setting practices are gradually shifting closer to what they were before the pandemic. We will need to see 2/5 BIS - Central bankers' speeches continued progress toward normalization of corporate price-setting behaviour for inflation to get back to the 2% target. Inflation expectations The other thing we are watching closely is inflation expectations. If people believe inflation will remain high for the long term, they will pay higher prices now to avoid even higher prices later. And that only makes it easier for businesses to keep raising prices. Recent surveys have shown that the inflation expectations of consumers and businesses have edged down. But our latest Survey of Consumer Expectations indicates Canadians' concern about inflation is still high even if it looks to be easing. And too many people still think CPI inflation will be higher over the next two years than we forecast it will be. Long-term inflation expectations remain consistent with the 2% target, which is a good thing. But we need to see short-term expectations coming down so that companies get back to normal price-setting behaviour and wage growth moderates. In our baseline forecast, the labour market will soften as the economy slows. Wage growth will ease. Businesses will revert to more normal price-setting behaviour. And near-term inflation expectations will come into line with the inflation target. But there is a risk that these adjustments will take longer or stall, and inflation will get stuck materially above the 2% target. Maintaining financial stability The biggest downside risk to our forecast is a severe global recession. A major international recession could come about in several ways. But one way is through global financial stress. Financial instability could amplify or even trigger a sharper slowdown of the global economy. Recent international banking stresses have been a reminder that financial instability can strike quickly.1 In March, the collapse of Silicon Valley Bank and Signature Bank in the United States and the severe market pressure on Credit Suisse led to immediate spillovers to other financial institutions. Financial market volatility rose sharply, and credit conditions tightened. Fortunately, authorities took swift and forceful actions to protect depositors, maintain confidence and keep credit flowing. Combined with the safeguards put in place after the 2008–09 global financial crisis that made financial institutions and the overall system more resilient, these actions have limited financial contagion. Nonetheless-as the recent government-led sale of the First Republic Bank to JP Morgan highlights-vulnerable institutions can still come under severe market stress. Here in Canada the spillover effects have been muted, reflecting the financial stability we are known for internationally. This stability reflects a combination of strengths, including the structure of our financial system, strong risk management within our financial institutions, and sound regulation and supervision. 3/5 BIS - Central bankers' speeches But financial stability risks remain, and we continue to see swings in market sentiment. If global financial stress were to re-emerge and prove more pervasive, the spillover effects into Canada could be more significant. In addition, global stress could interact with domestic vulnerabilities related to high household indebtedness and the potential for a more pronounced contraction in the housing market. So even though, in our basecase projection, financial stresses remain contained, I'd like to say a few words about how price stability interacts with financial stability. The first point is that it's not one or the other. We need both price stability and financial stability. Price stability-confidence in the value of money-is the foundation of a stable and well-functioning financial system. And financial stability is a pre-condition for price stability. To put it another way, the uncertainty that comes with high inflation, or a lack of price stability, is not going to improve financial stability. And severe financial stress will only make achieving price stability more complicated. The second point is that we have separate mandates and separate tools for price stability and financial stability. So we can work to achieve both at the same time. Our primary tool for bringing demand and supply in the economy into balance and restoring price stability is our policy interest rate. In the event of severe stress in the financial system, we have a range of tools we can use to provide liquidity against good collateral and keep credit flowing. The third point is that price and financial stability can interact, and we take this into account. Financial stress will generally have implications for the calibration of monetary policy. Financial stress tightens financial conditions-this means that loans become more expensive and harder to get. In the current environment, monetary policy has already tightened financial conditions-that is the intended consequence of our policy rate increases. But if financial stress were to lead to more tightening than expected and if this were to persist, we would need to take this into consideration as we set the policy rate to achieve our inflation target. At the same time, the financial system needs to adjust to higher interest rates. This underscores the importance of sound risk management in financial institutions and vigilant supervision to identify and manage risks as the economy slows and the cost of funding adjusts to higher interest rates. Conclusion Let me conclude so we can open the floor for discussion. We're forecasting inflation to fall quickly to about 3% this summer and to reach the 2% target near the end of 2024. The projected decline from 3% to 2% is both slower and more uncertain. With growth anticipated to be weak through the rest of the year before picking up gradually next year, we expect services price inflation to ease and overall inflation to converge on the 2% target. But several things still have to happen for services price inflation to moderate in line with our forecast, and we are watching these closely. Last month, Governing Council decided to hold its policy rate steady at 4½% as we assess whether monetary policy is restrictive enough to return inflation to the 2% target. 4/5 BIS - Central bankers' speeches We know that monetary policy works with a delay, and the effects of the tightening we've undertaken to date have not yet fully worked their way through the economy. If we start to see signs that inflation is likely to get stuck materially above our 2% target, we are prepared to raise rates further. We also stand ready to address financial instability. Recent global financial stresses have had muted effects here in Canada, but if more severe stress emerges, we have the tools to provide liquidity while we continue to work toward restoring price stability. The adjustment to higher interest rates hasn't been easy, but the alternative-continued high inflation-is worse. Price stability is foundational to shared prosperity. The economy works better when inflation is low, stable and predictable, and it's better for Canadians. Price stability protects households from the anxiety created by large changes in the cost of living. And it means households and businesses can budget, save and invest with confidence. That's the destination. We're on our way, and we will stay the course. I look forward to discussing all of this with all of you. Thank you. I would like to thank Gino Cateau and Grahame Johnson for their help in preparing this speech. 1 See T. Gravelle, "The Bank of Canada's market liquidity programs: Lessons from a pandemic" (speech delivered to the National Bank Financial Services Conference, Montréal, Quebec, March 29, 2023). 5/5 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the release of the Financial System Review, Ottawa, Ontario, 18 May 2023.
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Tiff Macklem: Release of the Financial System Review Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the release of the Financial System Review, Ottawa, Ontario, 18 May 2023. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss the Bank of Canada's Financial System Review (FSR). In addition to its price stability mandate, the Bank plays a critical role in preserving and promoting the stability of the Canadian financial system. Financial system stability and price stability go hand in hand. Price stability-confidence in the value of money-is the bedrock of a stable, well-functioning financial system. And financial stability is a precondition for price stability. The FSR is our annual assessment of risks that could test the resilience of Canada's financial system and affect its important role of serving the economy. It is different from the Monetary Policy Report (MPR), which provides our outlook-our forecast-for the Canadian economy. The FSR is not a forecast. It does not provide what we view as the most likely outcome for the financial sector. Rather, it examines the vulnerabilities and risks that could test the stability of Canada's financial system and affect its ability to act as a shock absorber. And as Carolyn will explain shortly, this year's FSR takes a slightly different approach from previous versions, with the aim of outlining areas of concern more clearly and concisely. Over the past year, global financial conditions tightened in response to monetary policy actions aimed at reducing inflation. The forceful response by central banks, including here in Canada, is proving successful at bringing inflation down. At the same time, we have seen periods of volatility and pockets of stress, particularly in the US banking sector. Just as households, businesses and governments are adjusting to higher global interest rates, so must the financial sector. As this adjustment unfolds, participants in the financial system, regulators and central banks must all be vigilant. The recent banking stresses in the United States and Switzerland are a reminder that risks can materialize and spread quickly. They highlight that the business models of some financial institutions rely too much on an environment of low interest rates and low market volatility. Fortunately, authorities in those countries took swift actions to limit the spillover effects of these stresses to the broader financial system. Equally important, banks around the world are more resilient today than they were before the 2008–09 global financial crisis, thanks to significant improvements in financial buffers and risk management practices. Here in Canada, regulators have taken important steps to ensure that Canada's financial system and Canadian banks remain robust. 1/3 BIS - Central bankers' speeches Nevertheless, if global financial stress were to re-emerge and prove more persistent, Canada could see more significant spillover effects-especially if stresses triggered a severe global recession and interacted with existing vulnerabilities. Let me now turn to Carolyn to discuss all of this in more detail. Thank you, Governor. As the Governor noted, the FSR is not a forecast. It's a deliberate look at what could go wrong and the resulting implications for financial stability. And this year we've reorganized the FSR to make our communication about these potential risks clearer. We've moved away from discussing financial system vulnerabilities and risks separately. Instead, we've combined them and organized them under key sectors or areas of focus. This approach reduces repetition and allows for a more concise analysis of the kind of risk that could arise if future shocks were to occur. You can expect further changes and refinements in next year's FSR. Let me take you through three areas we're monitoring closely. The first is Canadian bank funding. Banks channel money from savers and investors to borrowers. As interest rates go up, banks need to pay savers and investors more, so the funding they use to make loans becomes more expensive. This is an intended outcome of monetary policy tightening. The increase in bank funding costs is coming at a time when sources of low-cost deposits are declining. And Canadian banks generally have more demand for loans than can be funded solely by Canadian deposits and investments, so they rely on attracting additional funding from global wholesale markets. These markets can be significantly affected by global events, such as the recent banking stress. We are closely monitoring the combined impact of these factors on bank funding. The recent turbulence in global markets stemming from bank failures had little direct impact on Canadian banks. But if global stresses were to return and persist, bank funding costs could rise beyond the higher levels induced by tighter monetary policy. In addition, in a severe stress situation, funding could also become harder to secure. In response, banks would likely constrain credit to households and businesses, potentially exacerbating an economic downturn. The second area we are monitoring closely is the interaction between global stresses and liquidity in fixed-income markets, both globally and in Canada. In an environment of greater pressure on bank funding, major banks may have less capacity to supply liquidity to market participants in periods of stress, which is when they need it most. This market liquidity is crucial to financial stability, given the growing importance of asset managers and other non-bank financial intermediaries that rely on it. The extreme market stresses at the outset of the COVID-19 pandemic showed that the financial system is vulnerable to sudden spikes in demand for market liquidity. The third area the Bank is watching closely is the ability of Canadian households to service their debt at higher interest rates. Higher debt-servicing costs are stretching 2/3 BIS - Central bankers' speeches budgets and reducing borrowers' financial flexibility. About one-third of households have seen their mortgage payments increase since February 2022, just before the Bank started raising its policy interest rate. More households will see their payments go up in the next few years as they renew their mortgages. Lenders and regulators are taking steps to provide borrowers with options for managing higher payments, such as extending amortizations. However, as borrowers make use of these options, they may have less capacity to absorb future shocks. Canadians have a long history of paying their debts even under stressed conditions. And, so far, households are proving resilient despite the sharp increase in interest rates. However, in a severe and prolonged recession, mortgage defaults could rise, leading to credit losses for lenders. That, in turn, could lead to a further pullback in credit, worsening the downturn. This Review also outlines emerging risks that we are monitoring, including cyber incidents and climate-related financial risks. It also provides an update on developments in cryptoasset markets. I'll conclude by underlining a few things about resilience. The vulnerabilities described in the FSR may not threaten overall financial stability on their own. But shocks tend to have more impact when vulnerabilities have built up. So our main message is that-as the adjustment to higher interest rates continues-financial institutions need to adapt, and central banks and regulators need to be extra vigilant. I also want to assure Canadians that the steps taken to bolster our financial system are proving their worth. Canadian banks are held to the highest global regulatory standards and subject to rigorous supervision. At the Bank of Canada, we will continue to monitor the financial system closely for signs of stress. And we have the tools needed to provide emergency liquidity if severe stresses develop. In fact, we recently reviewed our pandemic-related liquidity interventions to help us better target our responses in the future. We stand ready to act, if needed, to safeguard the stability of the Canadian financial system. The Governor and I will now be happy to take your questions. 3/3 BIS - Central bankers' speeches
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Remarks by Mr Paul Beaudry, Deputy Governor of the Bank of Canada, at the Greater Victoria Chamber of Commerce, Victoria, British Columbia, 8 June 2023.
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Remarks by Paul Beaudry Deputy Governor Bank of Canada June 8, 2023 Victoria, British Columbia Economic progress report: Are we entering a new era of higher interest rates? “Presume not that I am the thing I was…” – William Shakespeare Introduction Thank you for the kind welcome and thank you to the Greater Victoria Chamber of Commerce for giving me the opportunity to be here today. It is always a real pleasure to visit beautiful Victoria. I live in Vancouver, but I often make the trip across to Vancouver Island to take advantage of the natural beauty here. I love riding the Galloping Goose trail out to Sooke to visit the potholes or hiking the beaches in Juan de Fuca Park. I could go on all day about the wonders of Victoria and the island, but instead—and I hope you won’t be disappointed—I will focus my talk on interest rates. First, I want to talk about the Bank of Canada’s decision yesterday to raise our policy rate to 4¾%. I will elaborate a bit on our discussion and the thinking behind our decision. Then I will take a step back and look at where interest rates may be going two or three years into the future and beyond. I will consider the question of where interest rates are likely to settle once inflation has normalized, and whether we may be entering a new environment of higher interest rates. To do this, I’ll explore some of the factors that influenced interest rates in the decades before the COVID-19 pandemic and then discuss why these forces may now be shifting. The long-term path of interest rates is an important consideration for many household and business decisions. When a company plans a major investment in a new factory or a family buys a new house or car, they need to consider the cost of financing over many I would like to thank Thomas Carter and Ali Jaffery for their help in preparing this speech. Not for publication before June 8, 2023 15:10 Eastern Time -2years. This includes being ready for the possibility that interest rates could stay higher for longer. Now, I won’t claim to know with certainty where interest rates are going, but I can point to where some of the risks lie. By doing this, I am hoping to help Canadians prepare in case it turns out we have indeed entered a new, higher interest rate environment. But as I said, let’s start with the present, as I am sure you are curious to understand our thinking. Yesterday, Governing Council raised the policy rate to 4¾%. This was our first rate increase since January. When we paused five months ago, we said we needed time to assess whether our forceful monetary policy tightening—425 basis points in less than a year—was restrictive enough to return inflation to the 2% target. Put another way, we were looking for an accumulation of evidence that supply and demand were rebalancing, and price pressures were easing, in line with our inflation target. By our meeting in April, we were beginning to see some signs that more tightening might be needed and so we discussed the possibility of increasing the policy rate. At that time, we were concerned about elevated core inflation and the tightness in the labour market—including strong wage growth. We also discussed the possibility that consumer demand could be more robust than expected. The data since April have tipped the balance. The accumulation of evidence—across a range of economic indicators—suggests that excess demand in the Canadian economy is more persistent than we thought, and this increases the risk that the decline in inflation could stall. That’s why we decided to raise the policy rate. Let’s start with economic growth, which rebounded in the first quarter of 2023 to 3.1%. Consumption growth, in particular, was very strong at 5.8%, with household spending on both goods and services sharply higher. This surprised us. We had expected growth in demand for services to start to ease off, but Canadians continue to catch up on travel, entertainment and restaurant spending. More unexpected was the strength of the rebound in goods spending, particularly the demand for interest-rate-sensitive goods, like furniture and appliances. We also considered evidence that buyers were returning to the housing market, even as supply remained tight, which could further fuel inflationary pressures. We discussed how much the strength in consumption could be explained by strong immigration, ongoing pent-up demand and the continued unwinding of supply chain issues. We determined that while these factors are at play to varying degrees, the bottom line is there appears to be more momentum in demand than we expected. We also talked about the labour market. While there are fewer job vacancies, unemployment remains near a record low. More workers are coming into Canada, but they are being hired very quickly, reflecting strong labour demand. On inflation, we discussed April’s unexpected tick up to 4.4% from 4.3% in March. While that might not seem like much, it was in the opposite direction of what we expected, and the details behind the headline number were concerning. In particular, three-month -3measures of core inflation remain elevated and seem to have lost their downward momentum. And goods inflation surprised us by accelerating in April, reversing course after months of deceleration. We still expect headline inflation to have eased in May and to be near 3% later this summer, but this is largely due to lower energy prices and what we call base-year effects—the comparison of current price gains with the very large gains a year ago. To sum up, when we looked at the recent dynamics in core inflation combined with ongoing excess demand, we agreed the likelihood that total inflation could get stuck well above the 2% target had increased. Based on this accumulated evidence, we decided to raise the policy rate to slow demand and restore price stability. We’ll have more to say about all of this in our July forecast. We know this tightening cycle has not been easy for many Canadians. But the alternative—not controlling inflation—would be far worse, particularly for people living on low or fixed incomes. When inflation is stable around the 2% target, it removes the anxiety created by large swings in the cost of living. Price stability means households and businesses can plan, budget and invest with confidence and allows our economy to work better. That is why the Bank remains focused on taking the steps needed to restore inflation to 2%. Breaking down interest rate movements That wraps up my discussion of yesterday’s decision, which was very much a look at what we are considering in the near term. Now let’s consider the forces influencing interest rates in the long term. To start, let’s look at the 25 years leading up to the pandemic, a period with a clear downward trend in long-term interest rates in Canada (Chart 1). This downward path is unmistakable, whether we’re talking about mortgage rates, business loan rates or yields on government bonds. -4Chart 1: Long-term nominal interest rates fell steadily in Canada over the 25 years before pandemic % Quarterly data, 1995Q1 to 2019Q4 Conventional mortgage rate Business loan rate Sources: Canada Mortgage and Housing Corporation via Haver Analytics and Bank of Canada 10-year bond yield Last observation: 2019Q4 To better understand the forces that drove that trend, it will be helpful to distinguish between three different types of interest rates: nominal rates, real rates and the neutral rate. Let me begin with the first two. The interest rates posted by your mortgage broker or set by the Bank are in nominal terms. To get the real interest rate, simply subtract inflation from the nominal rate. For example, if the nominal interest rate is 5% and inflation is stable at 2%, then the real interest rate is 3%. Why is this important? Because real rates are what determine the value in saving and the cost of borrowing. Think about it this way: let’s say you have $2,000 to spend on a trip to the Okanagan and want to decide whether to go now or save up for a few more years. If the nominal interest rate is 5% and the rate of inflation is 2%, then in three years your $2,000 trip will cost you about $2,120, but your savings will have grown to a bit over $2,300. This puts you ahead by roughly $180, reflecting a 3% real interest rate. You could use that extra money for a longer stay or a nicer hotel. In that sense, the real rate reflects how much more purchasing power you’ll ultimately get from your savings. If instead you were borrowing at a 3% real rate, then the real rate would reflect how much purchasing power you’d have to give up to service your debt. When we look at the yield on a 10-year Canadian bond in real terms in Chart 2, we can see that much of the decline in nominal rates in Chart 1 reflects falling real rates. This should not be surprising because inflation was quite stable around the 2% inflation target -5in the 25 years leading up to the pandemic. We can also see that the decline in long-term rates was not unique to Canada. Most advanced economies saw similar decreases. Chart 2: The decline in real yields was an international phenomenon Semi-annual data, April 1995 to October 2019 % -2 -4 Canada United States France Germany United Kingdom Canada Note: For each country, the real yield is computed as the difference between the nominal yield on 10-year government bonds and a measure of professional forecasters' inflation expectations over the next 10 years. Sources: National Sources, Consensus Economics and Bank of Canada calculations Last observation: October 2019 To make sense of this downward trend in long-term real rates, let’s turn to the concept of the neutral rate. As a first step, it is worth noting that long-term real rates largely reflect where markets expect short-term real rates to be in 5 or 10 years. This time frame is important because most economists agree that real rates at this horizon are outside the control of monetary policy and instead determined by deeper, structural forces. These structural forces shape what economists call the real neutral rate, meaning the level at which short-term real rates should settle over time. 1 Let’s think of this neutral rate as an anchor. Right now, the water is choppy because we are still feeling the shocks of the pandemic and the war in Ukraine. But that anchor is where the Bank thinks real rates should settle once the effects of those shocks have faded, inflation is back at the 2% target and the economy is in balance. To be clear, the neutral rate is not easy to pin down, nor is it static. It is carried along by the structural forces I just mentioned, and over time those forces pull all interest rates in the economy with it—from the Bank’s policy rate to mortgage and loan rates. As a result, if we want to make sense of the downward trends I just highlighted, it's important to understand how the real neutral rate is determined and what sort of structural forces could have caused it to drift lower over the 25 years before the pandemic. While the Bank often quotes the neutral rate in nominal terms, I will focus on the real neutral rate because the real component is what is affected by the structural forces we are discussing. The nominal neutral rate is calculated by adding the Bank’s 2% inflation target to the real neutral rate. The real neutral rate: Key drivers and their evolution Now, let’s talk about the drivers of the real neutral rate. In essence, it comes down to the balance between saving and investment in the medium to long run. Here, the main idea is that household saving filters through the financial system to finance investments made by firms. The saving and investment must balance out. When households have a strong desire to save but firms have few investment opportunities, the neutral rate needs to fall to balance them out. By contrast, when businesses have many opportunities for profitable investment, but households have little desire to save, the neutral rate is pushed up. Because Canada is a small open economy, it is the global balance of saving and investment that matters most for our real neutral rate. Most advanced economies are in the same boat, which is why Chart 2 shows such similar trends across countries. If we want to understand these trends, we need to consider the structural forces that could have led to upward pressure on global saving or downward pressure on global investment. Figure 1 illustrates these forces in action, showing how more desire to save from households should lead to a lower neutral rate (middle panel) and how the neutral rate would fall even further if firms’ investment opportunities were simultaneously shrinking (bottom panel). While I won’t be able to touch on all the potential forces in my remarks today,2 I want to flag four that are widely viewed as being key drivers in recent decades—three on the saving side, and one on the investment side. Other forces emphasized in the literature include changes in fiscal policy, the demand and supply of safe assets and the relative price of investment. Among many others, see L. Rachel and L. H. Summers, “On Secular Stagnation in the Industrialized World,” Brookings Papers on Economic Activity 50, no. 1 (2019): 1–76; and L. Rachel and T. D. Smith, “Are Low Interest Rates Here to Stay?” International Journal of Central Banking 13, no. 3 (2017): 1–42. In theoretical models, the real neutral rate is also commonly linked with trend growth, though empirical support for this link is mixed. See, for example, K. G. Lunsford and K. D. West, “Some Evidence on Secular Drivers of US Safe Real Rates,” American Economic Journal: Macroeconomics 11, no. 4 (2019): 113–139. -7Figure 1: Saving and investment determinants of the real neutral rate Real neutral rate (r) S(r) Initial equilibrium I(r) Saving (S), Investment (I) Real neutral rate (r) S(r) New equilibrium with upward pressure on saving I(r) Saving (S), Investment (I) Real neutral rate (r) S(r) New equilibrium with upward pressure on saving and downward pressure on investment I(r) Saving (S), Investment (I) -8Demographics and aging The first force has to do with demographics. Over the past two decades, both here in Canada and in other countries, the baby boomers have been nearing the end of their working years. This is important because people tend to save more as they approach retirement. Think of it this way: a 20-year-old is not likely to save as much as someone in their forties or fifties, because the older person is more focused on saving for retirement and, being further into their career, is also likely saving out of a higher salary. Large shares of the populations of advanced economies were at this saving-intensive stage of life, and this was a source of both upward pressure on global saving and downward pressure on real interest rates. These impacts were reinforced by an increase in life expectancy, which meant that people had to save more than previous generations to be ready for a longer retirement. 3 Integration of China and other high-saving economies into the global economy The second force has to do with the rapid rise of China and other low- and middleincome economies. Saving rates in many of these countries were high in recent decades. In part, this reflects lessons learned from financial crises, but it is also because these countries have weaker financial systems and social safety nets. If you can’t get insurance or a loan, or if you don’t have a reliable pension, then you must put aside more money to cover those gaps. And demographic trends similar to those I described under the first force would also have supported saving in some of these countries. As a result, as these nations grew and integrated into the global economy, they brought with them a new, large pool of saving that added to downward pressures on real rates. 4 Rising inequality The third force is rising income and wealth inequality. This trend has been much less pronounced in Canada than in other jurisdictions, such as the United States, but it matters in the context of global saving. Rising inequality means more resources are For details on these demographic mechanisms, see G. B. Eggertsson, N. R. Mehrotra and J. A. Robbins, “A Model of Secular Stagnation: Theory and Quantitative Evaluation,” American Economic Journal: Macroeconomics 11, no. 1 (2019):1–48; and E. Gagnon, B. K. Johannsen and D. López-Salido, “Understanding the New Normal: The Role of Demographics,” IMF Economic Review 69, no. 2 (2021): 357–390. Among others, see B. S. Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit” (remarks at the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia, March 10, 2005); R. J. Caballero, E. Farhi and P.-O. Gourinchas, “An Equilibrium Model of ‘Global Imbalances’ and Low Interest Rates,” American Economic Review 98, no. 1 (2008): 358–393; and N. Coeurdacier, S. Guibaud and K. Jin, “Credit Constraints and Growth in a Global Economy,” American Economic Review 105, no. 9 (2015): 2838–2881. -9concentrated among richer households, who tend to save more than average savers do. This created a growing source of downward pressure on real rates. 5 The “missing investment” puzzle The fourth force is on the investment side. A surprising trend in the years leading up to the pandemic was that levels of investment in advanced economies generally remained low despite a large fall in real interest rates. If the only forces at play were on the saving side, then lower real rates should have triggered higher investment (Figure 1, middle panel). This means another force was likely holding back investment over this period, putting further downward pressure on real interest rates. The precise reasons for this “missing investment” are difficult to pinpoint,6 but I can offer three examples of factors that may have played a role. The first is that profitable investment opportunities may have dwindled over time as more and more low-hanging fruit was picked. Second is that competitiveness has decreased: large and established firms have grown to dominate many industries, making it difficult for new and more innovative entrants to gain traction. And a third factor is that investment has shifted from physical assets, such as airplane engines and appliances, to digital or otherwise intangible ones, which may be more difficult to finance or to use as collateral.7 Where are real rates headed from here? Together, the four forces I described contributed to a sizable fall in real rates over the 25 years leading up to the pandemic. The big question now is: where do interest rates go post-pandemic? There’s a lot of uncertainty surrounding that question—and a significant diversity of views among economists. As a starting point, it’s important to understand that most of the structural forces driving the neutral rate are slow-moving, so you would not normally expect to see major changes over the span of just a few years. Consistent with this, the International Monetary Fund has said it sees no evidence of changes to the neutral rates of advanced economies compared with pre-pandemic See J. Platzer and M. Peruffo, “Secular Drivers of the Natural Rate of Interest in the United States: A Quantitative Evaluation,” International Monetary Fund Working Paper No. 2022/030 (February 11, 2022); and L. Straub, “Consumption, Savings, and the Distribution of Permanent Income,” Harvard University Department of Economics working paper (June 5, 2019). The term “missing investment puzzle” was originally coined by Bank of England Governor Andrew Bailey in a recent speech. See A. Bailey, “The economic landscape: structural change, global R* and the missinginvestment puzzle” (speech delivered to the Official Monetary and Financial Institutions Forum, July 12, 2022). For details on these three factors, see R. J. Gordon, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” National Bureau of Economic Research Working Paper No. 18315 (August 2012); G. Gutiérrez and T. Philippon, “Investmentless Growth: An Empirical Investigation,” Brookings Papers on Economic Activity 48, no. 2 (2017): 89–169; and Bailey (2022). - 10 estimates.8 And when we look at our own models, our most recent analysis suggests Canada’s neutral rate has not drifted much from its pre-pandemic range and currently lies around 0%–1% in real terms, or 2%–3% in nominal terms.9 Those ranges are our base case for where we think short-term rates will settle once inflation returns to normal. However, the risks around that base case are tilted to the upside. Looking across the four forces I just listed, there are good reasons to believe that some may be reaching a plateau or even changing course. That makes it unlikely the real neutral rate will fall below pre-pandemic estimates and creates a meaningful risk that it could go up.10 Take demographics and aging. In many countries, large shares of the population are no longer saving in preparation for retirement but are actually retired—so they are in a stage of life when people typically start spending their savings. This should be a source of downward pressure on global saving and upward pressure on real rates, though the precise extent and timing are difficult to predict. To be clear, this is not only a story about baby boomers in advanced economies. The one-child policy in China has led to a similar demographic shift in that country, shrinking the pool of saving it contributes to the global economy. 11 And, barring significant structural or political changes, it seems unlikely that another low- or middle-income country will be ready to bring in a new, China-sized pool of saving over the coming years. Geopolitical pressures could also make some countries less willing or able to channel their saving into the global financial system, relative to the patterns we saw over the 25 years before the pandemic. Some of the underlying drivers of inequality could also be waning and therefore causing less drag on real rates. For example, globalization may be stalling relative to the pace we saw in the 2000s,12 and the geopolitical pressures I just touched on could even send it into reverse. That could lead to less inequality within advanced economies, where the See International Monetary Fund, “Chapter 2:The Natural Rate of Interest: Drivers and Implications for Monetary Policy,” World Economic Outlook: A Rocky Road (April 2023). For details on the Bank’s most recent assessment of the Canadian neutral rate and a newly enhanced model supporting it, see, respectively, J. Champagne, C. Hajzler, D. Matveev, H. Melinchuk, A. PoulinMoore, G. K. Ozhan, Y. Park and T. Taskin, “Potential output and the neutral rate in Canada: 2023 assessment,” Bank of Canada Staff Analytical Note No. 2023-6 (May 2023); and Kuncl, M., and D. Matveev, 2023, “The Canadian Neutral Rate of Interest through the Lens of an Overlapping-Generations Model,” Bank of Canada Staff Discussion Paper No. 2023-5 (February 2023). For the Bank’s last pre-pandemic assessment, see T. J. Carter, X. S. Chen and J. Dorich, “The Neutral Rate in Canada: 2019 Update,” Bank of Canada Staff Analytical Note No. 2019-11 (April 2019). For a detailed exploration of many of these issues, see C. Goodhart and M. Pradhan, The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival (Cham, Switzerland: Palgrave Macmillan, 2020). See L. Zhang, R. Brooks, D. Ding, H. Ding, H. He, J. Lu and R. Mano, “China’s High Savings: Drivers, Prospects, and Policies,” International Monetary Fund Working Paper No. 2018/277 (December 2018). See S. Aiyar and A. Ilyina, “Charting Globalization’s Turn to Slowbalization After Global Financial Crisis,” IMF Blog (February 8, 2023). - 11 benefits of globalization have generally not been shared evenly.13 Population aging could further decrease inequality—as more and more people retire, labour becomes scarce relative to capital. Finally, with respect to the “missing investment” puzzle, the transition to a low-carbon economy is creating substantial new investment opportunities in green technology and green infrastructure. Adding to this, rapid advances in artificial intelligence could also reverse some of the investment-side weakness that I mentioned earlier. For these reasons, we may be entering a new era of public and private investment, and this could put upward pressure on real rates. Conclusion As you can see, important structural forces will affect rates in our post-pandemic world and beyond. My overall argument today is that a base-case scenario where the real neutral rate remains broadly in its pre-pandemic range is possible, but the risks appear mostly tilted to the upside. In the Bank’s view, that makes it more likely that long-term real interest rates will remain elevated relative to their pre-pandemic levels than the opposite. So what does this mean for you? Simply put, it’s important to think ahead. I hope that by highlighting some key drivers of long-term real interest rates and how they may evolve, I will help people be better prepared in the eventuality that we have entered a new era of structurally higher interest rates. You need only look to the recent stresses in the global banking sector to see examples of poor planning for the possibility of higher rates. And while I explained why considerable uncertainty remains around the outlook for real rates, let me close by circling back to nominal rates, which you will recall include an inflation component. Let me be clear: there should be very little uncertainty about that inflation component in the medium to long run. The Bank is committed to restoring price stability for Canadians by returning inflation to the 2% target. As I said earlier, we know higher interest rates are not easy for Canadians. But we also know that persistently high inflation would be harder. Our decision yesterday to raise the policy rate was not taken lightly. It was something we felt was necessary, based on the accumulation of evidence that I outlined for you today. We are committed to restoring price stability for the benefit of all Canadians. Thank you for your time. I am ready for your questions. See D. H. Autor, D. Dorn and G. H. Hanson, “The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade,” Annual Review of Economics 8 (2016): 205–240.
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 12 July 2023.
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Tiff Macklem: Release of the Monetary Policy Report Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 12 July 2023. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's policy announcement and the Bank of Canada's Monetary Policy Report (MPR). Today, we raised our policy interest rate by 25 basis points to 5%. We are also continuing our policy of quantitative tightening. This decision reflects two broad considerations. First, monetary policy is working, but underlying inflationary pressures are proving more stubborn. We have made considerable progress in the fight against inflation. Consumer price index (CPI) inflation has fallen from a peak of 8.1% last summer to 3.4% in May. But even as headline inflation has come down largely as we forecast, underlying inflationary pressures are proving more persistent than we expected. Higher interest rates are needed to slow the growth of demand in the economy and relieve price pressures. Second, we are trying to balance the risks of under- and over-tightening monetary policy. If we don't do enough now, we will likely have to do even more later. If we do too much, we risk making economic conditions unnecessarily painful for everybody. We've come a long way, and we don't want to squander the progress we've made. We need to stay the course to restore price stability for Canadians. Let me expand on these considerations and highlight a few key points in the Governing Council's deliberations. Since the beginning of the year, global growth has been stronger than expected. Lower energy prices and smaller price increases for goods have helped ease global inflation. But we're seeing persistent inflationary pressures in services, driven by robust demand and tight labour markets. The Bank estimates global economic growth will be stronger this year than we expected in January and April. It is a similar story in Canada. Growth has been surprisingly strong, and the economy remains in excess demand. Consumer spending on services remains robust. And while spending on many goods that are typically sensitive to interest rates has slowed, it has not slowed by as much as we expected. The housing market has also seen some pickup in activity. Several factors appear to be supporting household spending. 1/3 BIS - Central bankers' speeches The labour market remains tight, even if there are some signs of easing. The unemployment rate has increased slightly but remains historically low, and wage growth has been between 4% and 5%, higher than is consistent with price stability. Many households have also accumulated savings since the beginning of the COVID-19 pandemic. Some households have cut back on spending because inflation and higher rates have eaten into their budgets, and some are being severely squeezed. But for many, larger savings may be acting as a buffer and supporting consumer spending. Rapid population growth is contributing to both supply and demand in the economy. Newcomers to Canada are entering the labour force, easing the labour shortage. But at the same time, they add to consumer spending and demand for housing. Turning to inflation, while CPI inflation has fallen relatively quickly, much of the downward momentum has come from lower energy prices and base-year effects as the large price increases we saw last year fall out of annual inflation. We are still seeing large price increases in a wide range of goods and services. Our measures of core inflation-which we use to gauge underlying inflationary pressures-have come down but not by as much as we expected. Three-month rates of core inflation have been around 3½% to 4% since last September, suggesting little downward momentum in inflation. Consumer and business expectations for near-term inflation are moderating, but they are still high. And businesses are saying they are still increasing their prices more frequently than they did before the pandemic. Looking ahead, we continue to expect economic growth to moderate and inflation to ease, but this will take longer than we forecast in January and April. As the global economy slows and higher interest rates work their way through the Canadian economy, we expect economic growth to average about 1% through the second half of this year and the first half of next year. This means the economy moves into modest excess supply in early 2024, and this should relieve price pressures. CPI inflation is forecast to remain about 3% for the next year, before declining gradually to the 2% target in the middle of 2025. This is about six months later than we expected in April. Our decision to raise the policy rate reflected the persistence in both excess demand and underlying inflationary pressures, combined with our outlook for economic activity and inflation. The consensus among Governing Council was that monetary policy needed to be more restrictive to bring inflation back to the 2% target. These decisions are difficult, and we did discuss the possibility of holding rates unchanged and gathering more information to confirm the need to raise the policy rate. On balance, our assessment was that the cost of delaying action was larger than the benefit of waiting. Elevated inflation is a burden on Canadians, especially for the most vulnerable. We are also acutely aware that higher rates are making life more difficult for many Canadians. And we know many Canadians are asking: Is the Bank done raising interest rates, or will rates need to go higher still to relieve price pressures? The short answer is we will be taking each decision based on the information available at the time. 2/3 BIS - Central bankers' speeches What we can say is that monetary policy is working, and we know it will take more time for the full effects of past interest rate increases to work their way through the economy. With the increases in our policy rate in June and July, our outlook has inflation going gradually back to the 2% target. But several things need to happen for inflation to continue easing. And we are particularly concerned about two upside risks to the outlook. First, we have been surprised by the persistence of excess demand and underlying inflation in Canada and globally. We know that higher rates are having an impact, but how big their impact will be is uncertain. Second, with the downward momentum in inflation waning and our forecast suggesting inflation will be around 3% for the next year, we are concerned that the progress to price stability could stall, and inflation could even rise again if there are upside surprises. As I said, we are trying to balance the risks of over- and under-tightening. If new information suggests we need to do more, we are prepared to increase our policy rate further. But we don't want to do more than we have to. These decisions will be guided by our assessment of incoming data and the outlook for inflation. We need to see demand growth slow, wage pressures moderate and corporate pricing behaviour normalize. We will also need to see near-term inflation expectations and measures of core inflation come down further. Let me conclude. The substantial drop in inflation over the past year is welcome news for all Canadians. But monetary policy still has work to do-our job is not done until inflation is centred on our 2% target. That is the level that helps the economy grow sustainably, restores competitive forces in the economy and gives Canadians the price stability they need to budget and invest with confidence. With that summary, the Senior Deputy Governor and I would be pleased to take your questions. 3/3 BIS - Central bankers' speeches
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Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Calgary Chamber of Commerce, Calgary, Alberta, 7 September 2023.
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Remarks by Tiff Macklem Governor of the Bank of Canada Calgary Chamber of Commerce September 7, 2023 Calgary, Alberta Economic progress report: Target in sight, but we’re not there yet Introduction Good afternoon. It’s a pleasure to be here. I want to thank the Calgary Chamber of Commerce and the Bank of Canada’s Calgary office for setting up such an impressive event. I look forward to meeting with and hearing from many of you while I’m in Alberta. Monetary policy is working to bring inflation down—and we are encouraged by the progress we’ve made so far. Consumer price index (CPI) inflation was 3.3% in July, roughly in line with what we expected in our July Monetary Policy Report. Our 2% target is now in sight. But we are not there yet and we are concerned progress has slowed. Monetary policy still has work to do to restore price stability for Canadians, and we are committed to staying the course. In my time with you here, I will begin by discussing our recent monetary policy decisions. Then I want to dig into the inflation data to give you a sense of what we’re seeing and what we’re looking for on the path to price stability. I also want to outline the progress we’ve seen in rebalancing demand and supply in the economy. How these evolve will be critical to our policy decisions going forward. Finally, I want to answer a question we are getting more frequently from Canadians: Why are we so focused on the 2% target? Isn’t being close to 3% good enough? The short answer is no—and I’ll explain why we’re committed to getting all the way back to 2%. Our recent monetary policy decisions At both our June and July monetary policy decisions, we increased our policy rate, bringing it to 5%. These were difficult decisions. But they reflected the accumulated evidence that excess demand in the economy and underlying inflationary pressures were both proving more persistent. And it was our judgment that more restrictive monetary policy was needed to restore price stability for Canadians. I would like to thank Don Coletti and Mikael Khan for their help in preparing this speech. Not for publication before September 7, 2023 1:55 pm Eastern Time -2The data since mid-July are providing clearer evidence that higher interest rates are moderating spending and rebalancing demand and supply in the economy. However, we remain concerned that overall inflationary pressures are persisting and larger-than-normal price increases remain broad-based across the goods and services Canadians buy regularly. Just as it took longer to see clearer evidence that higher interest rates were moderating demand in the economy, it may now be taking longer for this to translate into lower inflationary pressures. We know it takes time for interest rate increases to work their way through the economy and relieve price pressures. The other possibility, of course, is that monetary policy is not yet restrictive enough to restore price stability. And unfortunately, the longer we wait, the harder it’s likely to be to reduce inflation. In trying to balance the risks of under- and over-tightening, Governing Council decided yesterday to keep the policy rate at 5% and agreed there may be a need to raise the policy rate further if inflationary pressures persist. Going forward, we will be looking for further evidence that price pressures are easing. To assess the momentum in inflation, we use a broad range of indicators. Each month, inflation data are buffeted by many factors, some temporary, others more lasting. Given that monetary policy works with a lag, we need to try to see where inflation is going. So let me now dig into the data and unpack what we are seeing and what we are looking for. Unpacking inflation We’ve been saying for some time that inflation would be close to 3% this summer. It fell to 2.8% in June before moving up to 3.3% in July, so we are about where we expected (Chart 1). Chart 1: Year-over-year inflation has declined % Jan-2020 Jul-2020 Jan-2021 CPI-median Source: Statistics Canada Last observation: July 2023 Jul-2021 Jan-2022 CPI-trim Jul-2022 Jan-2023 Total CPI -2 Jul-2023 -3The biggest contribution to the slowing in inflation since the peak last year has been from energy, which accounts for two-thirds of the slowdown (Chart 2). Price increases in consumer durables like furniture and appliances have also slowed as supply disruptions eased and higher borrowing costs reduced demand. Chart 2: Prices of gasoline and consumer durables* have contributed to the fall in inflation from the recent peak June 2022–July 2022 -1 -0.11 Percentage points -0.15 -1 -0.37 -2 -2 -0.99 -3 -3 -4 -4 -5 -3.18 -6 Shelter Food from stores Services Goods excluding excluding shelter food and energy Energy -4.80 -5 -6 Total *Consumer durables are included in goods excluding food and energy. Sources: Statistics Canada and Bank of Canada calculations Last observation: July 2023 This is welcome progress, but we know that many prices—those for food, shelter and many services—are not cooling in the same way. And recently global oil prices have risen again, pushing gasoline prices up. This is expected to increase headline inflation in the near term. To capture the centre of gravity in inflation, we use several measures to look deeper than this headline and assess the underlying trend in inflation. So let me explain the inflation measures we look at and why. First, we track measures of core inflation, which exclude large price changes— whether up or down—that can obscure the underlying trend in inflation. Core inflation is running around 3.5%. This is true for year-over-year rates as well as for more timely three-month rates, suggesting inflationary pressures remain and downward momentum has slowed. We also carefully examine the distribution of annual price changes across CPI components. As you can see in panel a of Chart 3, while some prices go up and others go down, in normal times price changes tend to be clustered around the 2% target. When inflation went up last year (panel b), the distribution of price changes shifted to the right. The average increase was higher, and the range of price changes also widened, with some prices increasing very sharply. This points to one of the unpleasant consequences of inflation—high inflation also brings bigger swings in prices. Since inflation peaked in June 2022, the distribution of price changes has started to normalize, but the average price increase and the variability of price changes are both still higher than normal (panel c). -4Chart 3: The distribution of price changes across the CPI basket has begun to normalize a. December 2019 b. Peak, June 2022 c. July 2023 Note: In the chart and text, price changes refer to changes to the component price indexes in the CPI basket. CPI components are weighted by their respective basket weights. Solid lines indicate means of distributions; the dotted line indicates the 2% inflation target. Sources: Statistics Canada and Bank of Canada calculations Last observation: July 2023 Another way to gauge inflation pressures is to look at whether increases in the CPI reflect a few big price increases or a lot of smaller ones. Inflation is a generalized increase in prices. To measure the breadth of price increases, we track the share of CPI components whose prices are rising faster than normal. When inflation is close to target, typically about 30% of components rise faster than 3% and about 15% rise faster than 5%. When inflation rose last year, the share of components rising faster than 3% peaked at almost 80% and 65% were above 5%. Today, about 60% of CPI components are rising above 3% and about 45% are rising above 5% (Chart 4). So we’ve made progress, but larger-thannormal price increases are still broad-based. Chart 4: The shares of CPI components rising faster than 3% and 5% % remain too high Share above 3% Share above 5% Historical average share above 3% Historical average share above 5% Note: Historical averages, shown in dotted lines, are from January 1995 to December 2019. Sources: Statistics Canada and Bank of Canada calculations Last observation: July 2023 This highlights another problem with high inflation—no matter how carefully you shop, you can’t avoid it. Prices for almost everything are up, including for many necessities. For example, rent was up about 5% in July, and home insurance and -5cleaning products were both above 9%. Price increases for food average around 9%, with those for many items in double digits—bakery and cereal products were up 12%, while baby food was up 11%. The single price increase that is having the biggest impact on CPI inflation is mortgage interest costs, which have gone up as we’ve increased interest rates. They’re about 30% higher than they were a year ago. When you exclude mortgage interest costs, CPI inflation is close to 2½%—which has led some to argue that inflation is effectively back at target. It’s true that if we hadn’t raised interest rates, mortgage costs might be lower today, but inflation throughout the economy would be a much bigger problem for everyone. To measure underlying inflation, we need a more systematic way of excluding components with big movements on both the upside and the downside. Of course, if you take out only the things that are going up a lot, inflation looks lower. That’s why we use the core measures I mentioned a minute ago. CPI-trim, for instance, has excluded mortgage interest costs in each of the past 14 months. Nevertheless, it is still running at close to 3.5%, because it also excludes prices that have declined sharply. So the underlying trend shows inflation is still well above target. And the longer the underlying trend remains too high, the harder it can be to bring inflation down. Why? Because when households and businesses expect inflation to be above 2%, buying patterns and corporate pricing behaviour adjust. When that happens, it becomes more difficult to bring inflation back to 2%. Looking ahead, we want to see less-generalized price increases as well as a decline in the average price increase. Both of those things are happening, but they need to keep happening to restore price stability for Canadians. Slowing demand That brings me to the other factor we’re watching closely: the balance between demand and supply in the economy. Inflation has come down from 8% because supply chains have opened up, energy prices have fallen and the big price increases of a year ago have dropped out of the data. For inflation to continue to decline, we need demand to continue to grow more slowly than supply for a period of time. That will relieve price pressures, slow increases in labour costs and restore normal price-setting behaviour. And that’s what will bring inflation sustainably back to target. But I want to be clear—we are not trying to kill economic growth. We want strong, sustainable growth and a healthy labour market. The best contribution we can make to these objectives is to deliver low, stable and predictable inflation. Price stability is a cornerstone of a market-based economy—without it, nothing works well. The way we achieve price stability is by using the policy interest rate to find a balance between demand and supply in the economy. Too much demand, and inflation rises above target. Too little, and inflation falls below target. We’ve seen both in the last three years. At the beginning of the pandemic, demand collapsed and inflation fell below 1%—and was even briefly negative. We used all of the tools at our disposal to support the economy so that -6Canadians could continue to pay their bills, businesses could stay afloat and people would have jobs to go back to when the shutdowns ended. As economies around the world reopened, supply chains became tangled and demand for goods and services came roaring back. Businesses could not keep up with demand, prices rose quickly and inflation became a big problem. The shift into excess demand required the opposite policy reaction, and we raised interest rates forcefully to dampen growth, give supply time to catch up and relieve price pressures. So how well is it working? The output gap—the difference between total spending in the economy and the economy’s productive capacity—provides the broadest measure of that balance. By our estimates, excess demand peaked in the first half of last year. That’s when the economy was the most overheated. Since then, excess demand has eased gradually. Last week, gross domestic product (GDP) data showed that growth for the second quarter was essentially zero. That means that growth has averaged a little less than 1% over the last three quarters, and our best estimate is that the economy’s productive capacity has grown at a rate of a little over 2%. The cumulative effect is that the excess demand in the economy has diminished substantially. This should reduce price pressures, leading to lower inflation. The weakness in second-quarter GDP largely reflected a broad-based slowing in consumer spending and a decline in housing activity. The softening in household spending on goods was most pronounced on larger items people often buy on credit, such as furniture and durables for outdoor recreation. Together with the decline in housing activity, this points to the moderating effect higher interest rates are having on household spending. Consumption of services also slowed, which may indicate that the effects of tighter monetary policy are broadening from goods to services. The weakness in overall economic growth was magnified by a few unexpected events. Most notably, devastating wildfires across the country have destroyed homes, evacuated cities and weighed on economic activity across several sectors. Alberta has been hard hit, and this has disrupted oil and gas production in particular. The labour market is also an important indicator of the demand-supply balance in the economy. We’re seeing signs that labour demand is cooling from overheated levels earlier in the year, allowing labour supply to begin to catch up with demand. Employment was roughly flat in July, marking the fifth time in the last six months that job growth has been below the pace implied by population growth (Chart 5). -7Chart 5: Employment growth has been below population growth in recent months Net monthly job gains, seasonally adjusted, 3-month moving average Thousands Jul-2022 Oct-2022 Actual employment growth Jan-2023 Apr-2023 -20 Jul-2023 Employment growth implied by population growth Sources: Statistics Canada and Bank of Canada calculations Last observation: July 2023 So far, we’ve been able to cool demand without unemployment spiking. As I outlined last November, the fact that job vacancies were at a record high meant we had scope to cool the labour market without causing a large surge in unemployment. Nearly a year later, we can see that job vacancies have indeed fallen significantly (Chart 6), with only a small increase in the unemployment rate. Chart 6: Job vacancies have continued a downward trend % -20 -60 Job Vacancy and Wage Survey Indeed Note: Job Vacancy and Wage Survey (JVWS), change from 2019 average (seasonally adjusted), and Indeed online job postings, change from the average of the same month in 2018 and 2019 (not seasonally adjusted). Due to data limitations at the onset of the pandemic, JVWS job vacancies data are unavailable from April to September 2020. Sources: Statistics Canada, Indeed and Bank of Canada calculations Last observations: JVWS, June 2023; Indeed, August 2023 Wage growth, in contrast, has yet to show clear signs of moderation, with most measures around 4% to 5%. As the labour market continues to come into better balance, we expect wage growth will slow. We will be watching wage growth closely for evidence that confirms this rebalancing. -8Another indicator of the imbalance remaining between demand and supply—and thus of underlying inflationary pressures—is corporate pricing behaviour. As the economy reopened from pandemic restrictions and many costs rose quickly, companies protected their profit margins by passing all of their cost increases along to customers. They did this by increasing the prices for their products more often and by more than usual. As inflation comes down, businesses tell us their pricing-setting behaviour is beginning to normalize. Businesses increasingly expect the size and pace of price changes to decline. But corporate pricing behaviour is not yet back to normal, and it appears to be changing only slowly. In our second-quarter Business Outlook Survey, businesses said they still see high demand for many goods and services, and they remain worried about their costs. They still intend to change prices more frequently than normal over the next 12 months. As long as demand is running ahead of supply in the economy, it’s too easy for businesses to raise their prices. We will be watching corporate pricing behaviour carefully to be assured that the economy is clearly on the path to price stability. So that’s what we’ve seen in recent months and what we are watching closely. In October we will publish a new economic outlook. We will be looking for continued progress toward the economic rebalancing we need to relieve inflationary pressures and for more evidence that this is translating into lower underlying inflation. The 2% Target That brings me to a question we are increasingly getting from Canadians: If it’s going to be difficult to get to our 2% inflation target, and we’ll be closer to 3% for some time, why don’t we raise the target to 3%? Besides, if the control range around the target is 1% to 3%, aren’t we close enough? We understand why people are asking this question. Higher interest rates are painful. But getting to the 2% target is worth it. I want to be clear—we are committed to the 2% target. And for good reason. First, you don’t raise the target just because you missed it. We’ve been targeting 2% inflation since 1995, and the inflation target anchors our economic and financial system. If you get rid of the anchor, or move it when the going gets tough, inflation itself gets less predictable and more volatile. Nobody wants that. Second, the 2% target has delivered low and stable inflation and lower unemployment rates on average for 25 years in Canada. Most central banks have a 2% target because, at 2%, inflation is low enough that people don’t need to worry about changes in their cost of living from one year to the next. And we have a lot of evidence that, for many years now and in many countries, 2% inflation has worked to deliver historically superior macroeconomic performance. Third, the target is not 1% to 3%—it’s the 2% midpoint of the range. The 1% to 3% range conveys where Canadians can expect inflation to be most of the time. Between 1995 and 2019, inflation was in the 1% to 3% range 80% of the time. But to be in this range most of the time, we have to aim for the middle. If we decide 3% is good enough, inflation will be above the range a lot of the time. -9The bottom line is the 2% target is eminently achievable and has served Canadians well. Simply put, when inflation is stable around the 2% target, it removes the anxiety created by large swings in the cost of living. Price stability means households and businesses can plan and invest with confidence that their money will hold its value. I want to make one final point. We review our monetary policy framework, including our target, every five years so that we can be confident that it remains fit for purpose. This is a strength in our framework. Looking ahead, Canadian businesses, households and governments will need to confront some big global forces, including demographic changes, rising geopolitical tensions, climate change and digitalization. Some of these forces could add cost pressures and increase the volatility of prices.1 Some commentators have suggested this means we should target a higher rate of inflation. Understanding these forces and what they mean for monetary policy is at the very heart of delivering on our mandate. But it is not obvious that allowing for higher inflation will help us deal with these challenges. To the contrary, more inflation and the uncertainties that come with more volatility in inflation may make the needed adjustments even more difficult. These aren’t the first structural changes to confront the Canadian economy. The past 30 years have shown us that the 2% target has been a helpful anchor as businesses, households and governments face shifting economic forces. As with past reviews, we will work hard to analyze how the framework, including the 2% target, has been working and whether it’s the best framework for the future. Conclusion It is time for me to conclude. We’ve come a long way in the past year. Monetary policy is working, and inflation is coming down. But we still have some way to go to restore price stability. With past interest rate increases still working their way through the economy, monetary policy may be sufficiently restrictive to restore price stability. However, Governing Council is concerned about the persistence of underlying inflation. Inflation is still too high, and there is little downward momentum in underlying inflation. We will be carefully assessing the balance between demand and supply and underlying inflation to gauge progress toward price stability. If we need to raise interest rates further to restore price stability, we are prepared to take further action. But we don’t want to raise our policy rate more than we have to. We know higher interest rates are hitting some Canadians hard, and we don’t want this to be any harder than necessary. But letting too-high inflation persist 1 C. Lagarde, “Policymaking in an age of shifts and breaks” (speech at the Economic Policy Symposium “Structural Shifts in the Global Economy” organized by Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 25, 2023). - 10 would be worse. We are confident that 2% is the right target. The target is now in sight. We need to stay the course. I look forward to your questions. Thank you.
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Remarks by Ms Sharon Kozicki, Deputy Governor of the Bank of Canada, at the University of Regina, Regina, Saskatchewan, 19 September 2023.
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Remarks by Mr Nicolas Vincent, Deputy Governor of the Bank of Canada, at the Chamber of Commerce of Metropolitan Montreal, Montreal, 3 October 2023.
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 25 October 2023.
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Tiff Macklem: Release of the Monetary Policy Report Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 25 October 2023. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's policy announcement and the Bank of Canada's Monetary Policy Report (MPR). Today, we maintained our policy interest rate at 5%. We are also continuing our policy of quantitative tightening. Inflation has come down a lot since the summer of 2022, but as every Canadian knows, inflation is still too high. We held our policy rate steady today because monetary policy is working to cool the economy and relieve price pressures, and we want to give it time to do its job. But further easing in inflation is likely to be slow, and inflationary risks have increased. Let me expand on these themes and talk about the implications for monetary policy. Global economic growth is slowing as expected as higher interest rates and tighter financial conditions restrain demand. But the composition is a bit different than we forecast in July. The US economy has been surprisingly strong, while China has slowed more than expected. At the same time, geopolitical tensions have increased. The Russian war of aggression against Ukraine continues, and Hamas attacks in Israel have ignited conflict in Israel and Gaza. These wars are causing incalculable suffering. They are also hurting the global economy and adding uncertainty to the outlook. In Canada, the economy has slowed, and the data suggest demand and supply are now approaching balance. With the economy expected to move into excess supply this year and with growth anticipated to be weak for the next few quarters, price pressures should ease further. We expect inflation to ease gradually and return to the 2% target in 2025. But we're worried that higher energy prices and persistence in underlying inflation are slowing progress. Since our July MPR, we've seen clearer evidence that higher interest rates are moderating spending and rebalancing demand and supply. Economic growth has slowed over the past year, averaging about 1%. Household credit growth has softened, and so has demand for housing and many durable goods. More recently, we are seeing the services sector slow as well. With consumer spending expected to remain subdued through most of 2024, we've revised down our growth outlook. Growth in gross domestic product is forecast to remain below 1% for the next several quarters before picking up in late 2024 and rising to 2½% in 2025. As you know, we pay close attention to indicators of the balance between demand and supply in the economy, and these are now presenting a mixed picture. Estimates of the 1/3 BIS - Central bankers' speeches output gap suggest the economy is now roughly in balance or even in slight excess supply. Indicators of the labour market show it has eased considerably from overheated levels but still looks to be on the tight side. Job vacancies have eased but remain higher than normal, and the unemployment rate has risen a bit but is still low. Wage growth also remains elevated at 4% to 5%. What is clearer is that demand pressures have eased more quickly than we forecast in July. So what does that mean for inflation? We are already seeing more evidence that tighter monetary policy is reducing price pressures for many goods and services. And with the economy already or soon to be in excess supply, more downward pressure on inflation should be in the pipeline. But our outlook for near-term inflation is higher. Let me explain. The effects of higher interest rates are most evident in the prices of durable goods, like furniture and appliances that people often buy on credit. And these effects have also spread to many semi-durables-a category that includes things like clothing and footwear-as well as many services excluding shelter. Inflation in these categories is now running generally at or below 2%. Price increases for groceries, while still elevated at almost 6%, have also eased and are expected to moderate further. Despite this, we've revised up our outlook for inflation. Higher energy prices, structural pressures in our housing market and stickiness in underlying inflation are all slowing the return to target. Higher global oil prices have driven up gasoline prices, and we now expect oil prices to remain higher than we assumed in July. Inflation in shelter prices is running above 6%. Part of this is due to higher mortgage interest costs following increases in our policy interest rate. But it also reflects higher rents and other housing costs, and these pressures are more related to the structural shortage of housing supply. Finally, nearterm inflation expectations and wage growth remain elevated, and corporate pricing behaviour is normalizing only slowly. All this is making underlying inflation more persistent. The combined impact of all these factors is that we now expect inflation to be about 3½% through to about the middle of next year. As excess supply in the economy increases, inflation should ease further in 2024 and reach 2% in 2025. There are both upside and downside risks to this forecast and the future path for inflation remains uncertain. Overall, inflationary risks have increased since July. Today's forecast has inflation on a higher path than we expected. In addition, rising global tensions are increasing risks. In a more hostile world, energy prices could move sharply higher and supply chains could be disrupted again, pushing inflation up around the world. To be confident that our policy rate is high enough to get inflation back to 2%, we need to see more easing in our measures of core inflation. We remain focused on a number of indicators of underlying inflation pressures, particularly the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour. 2/3 BIS - Central bankers' speeches With clearer evidence that monetary policy is working, Governing Council's collective judgment was that we could be patient and hold the policy rate at 5%. We will continue to assess whether monetary policy is sufficiently restrictive to restore price stability, and we will monitor risks closely. Today's decision also reflected our best efforts 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-and we cannot let high inflation become entrenched in the economy. If inflationary pressures persist, we are prepared to raise our policy rate further to restore price stability. We've made a lot of progress, but we're not there yet. We need to stay the course. When price stability is restored, the economy will work better for everyone. With that summary, the Senior Deputy Governor and I would be pleased to take your questions. 3/3 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 30 October 2023.
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Tiff Macklem: Opening statement before the House of Commons Standing Committee on Finance Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 30 October 2023. *** Good afternoon. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcement and the Bank of Canada's Monetary Policy Report. Last week, we maintained our policy interest rate at 5%. We held our policy rate steady because monetary policy is working to cool the economy and relieve price pressures, and we want to give it time to do its job. But further easing in inflation is likely to be slow, and inflationary risks have increased. Before I take your questions, let me give you some economic and financial context for the decision. Since the last time we were here with you, the Canadian economy has slowed, and the data suggest demand and supply are now approaching balance. We're now seeing clearer evidence that higher interest rates are moderating spending and relieving price pressures. The economy has entered a period of weaker growth, with growth averaging about 1% over the last year. Growth in gross domestic product (GDP) is forecast to remain below 1% for the next several quarters before picking up in late 2024 and rising to 2½% in 2025. With the economy expected to move into excess supply this year and with growth anticipated to be weak for the next few quarters, we think there's more inflation relief in the pipeline. We expect inflation in Canada to ease gradually and return to our 2% target in 2025. But we're worried that higher energy prices and persistence in underlying inflation are slowing progress. The effects of higher interest rates on inflation are most evident in the prices of durable goods, like furniture and appliances that people often buy on credit. These effects have also spread to many semi-durable goods-a category that includes things like clothing and footwear-as well as many services excluding shelter. Inflation in these categories is now running generally at or below 2%. Price increases for groceries, while still elevated at almost 6%, have also eased and are expected to moderate further. However, a number of factors are getting in the way of low inflation. Higher global energy prices are increasing prices at the pump. And that is pushing headline inflation back up. Structural supply shortages in our housing market are boosting prices for shelter. In addition, near-term inflation expectations and wage growth remain elevated, and corporate pricing behaviour is normalizing only slowly. 1/2 BIS - Central bankers' speeches Since we will be discussing housing in more depth today, let me provide some additional detail now. The rise in interest rates has cooled demand for housing. Since February 2022, housing resales have declined by 33% and house prices by about 10%. But shelter price inflation has picked up, running at above 6%. Structural pressures in our housing market are slowing the return of inflation to target. Shelter price inflation has become more broad-based, with rent and other accommodation expenses increasing, in addition to the ongoing rise in mortgage interest costs, which is related to our policy rate increases. We look forward to discussing these housing dynamics with you in more depth. The combined impact of all these pressures on inflation is that we now expect inflation to be about 3½% through to about the middle of next year. As excess supply in the economy increases, inflation should ease in 2024 and reach 2% in 2025. Overall, inflationary risks have increased since July. The forecast we released last week has inflation on a higher path than we expected last summer. In addition, rising global tensions, particularly the war in Israel and Gaza, have increased the risk that energy prices could move higher and supply chains could be disrupted again, pushing inflation up around the world. With clearer evidence that monetary policy is working, my colleagues on the Bank's Governing Council and I judged last week that we could be patient and hold the policy rate at 5%. However, to be confident that our policy rate is high enough to get inflation back to 2%, we need to see more easing in our measures of core inflation. We will continue to assess whether monetary policy is sufficiently restrictive to restore price stability, and we will monitor risks closely. Our decision last week reflected our best efforts to balance the risks of over- and undertightening. 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-and we cannot let high inflation become entrenched in the economy. If inflationary pressures persist, we are prepared to raise our policy rate further to restore price stability. In summary, we have made a lot of progress reducing inflation, but we are not there yet, and we need to stay the course. When price stability is restored, the economy will work better for everyone. With that summary, I would be pleased to take your questions and begin our discussion. 2/2 BIS - Central bankers' speeches
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Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the Advocis Vancouver, Vancouver, British Columbia, 9 November 2023.
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Carolyn Rogers: Financial stability in a world of higher interest rates Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the Advocis Vancouver, Vancouver, British Columbia, 9 November 2023. *** Introduction Good morning. I'd like to start by thanking Advocis Vancouver for inviting me here today. And thank you for the kind introduction. The Bank of Canada's main job is to control inflation, but we also play a critical role in promoting the stability of the Canadian financial system. Each spring, we publish the Financial System Review (FSR), which outlines risks and vulnerabilities that could test the system's resilience. We also update Canadians on financial stability issues in a speech every autumn, as I am doing today. Given the forceful response by central banks since early 2022 to get inflation under control, this year's FSR focused on the adjustment of the financial system, globally and in Canada, to the large and rapid increase in interest rates.1 Since the FSR, we've seen more evidence that the financial system is continuing to adjust. But there is more adjustment to come as past interest rate increases work their way through the system. Your view of current interest rates probably depends, at least in part, on your age. On one hand, if you had a mortgage in the 1970s or early '80s, today's rates may not seem very high. On the other hand, young people buying homes today are facing some of the highest borrowing costs they've ever seen. In any case, we've all been through a lengthy period of very low interest rates. Before rates started rising last year, they had been unusually low for a long stretch of time that started during the 2008–09 global financial crisis. And it may be tempting to believe the low rates that we all got used to will eventually come back. But there are reasons to think they may not. Adjusting to a world of higher interest rates would be a big change for everyone in the financial system-from governments, businesses and households to financial planners and investors. Financial stability and resilience are all about adjusting to changegradually and proactively. Adjusting early and bit by bit lowers the risk of having to take more abrupt and possibly destabilizing steps later. So today I'm going to talk about why it's important for the stability and resilience of the financial system that people plan for and adjust to a potentially higher interest rate environment. I'll touch briefly on why we could end up in such a world going forward. Then I'll touch on some of the adjustments we're already seeing and what else we could see as the process continues. 1/5 BIS - Central bankers' speeches I'm aiming to be brief to allow plenty of time for questions and discussion. Why interest rates could stay higher than we're used to Let me start by saying the Bank's monitoring of the financial system doesn't lead to a forecast of likely outcomes for the financial system or the economy. So, I want to be clear that when I talk about interest rates, I'm not making predictions about the path for monetary policy. I'm not here to tell you whether our policy rate has peaked or when it might start going down. What I will share with you are those factors we see as having an impact on the direction of long-term interest rates, some of the reasons we could see rates stay higher for longer and why it's important to adjust proactively to that possibility. The Bank's policy interest rate is currently at 5%. But from the global financial crisis through the first two years of the COVID-19 pandemic, the policy rate was close to zero much of the time, and it never topped 1.75%. In fact, the trend for a range of interest rates that affect borrowing costs in the financial system was downward for several years too. My former colleague, Deputy Governor Paul Beaudry, spoke about the reasons for this in a speech last June. 2 He described the structural forces at a global level that, for many years, combined to push long-term interest rates lower in Canada and other advanced economies. These forces included aging baby boomers that were saving more, China and other developing nations joining the global economy and fewer attractive investment opportunities for businesses. Paul also explained that some of these forces look to have peaked and could start reversing. This would put upward pressure on interest rates. We also look now to be in an era of higher levels of government debt. And geopolitical risks, such as an escalation of the war in Ukraine or the war in Israel and Gaza, could push rates higher globally-if they were to affect energy prices and supply chains in ways that could have a lasting impact on inflation. All this obviously involves a lot of uncertainty. But it's not hard to see a world where interest rates are persistently higher than what people have grown used to. What adjusting to higher interest rates looks like Globally, the adjustment to higher interest rates is well underway. Risk-free long-term rates in a range of major economies have risen by about 300 basis points since mid2021, when global inflationary pressures started to build. It's therefore become more expensive for individual and corporate borrowers to service their debts. At the same time, financial institutions are facing higher funding costs.3 This all leaves less wiggle room for the global financial system if a shock, such as an abrupt tightening of financial conditions, were to occur. And we've already seen a few of these shocks. There was the stress in the UK gilt market last autumn. And there were the stresses that emerged in the US and Swiss banking sectors this past March. Both 2/5 BIS - Central bankers' speeches episodes were triggered, in part, by a sharp rise in bond yields that caught parts of the financial system off guard. Those earlier stresses didn't lead to stress in the Canadian financial system. But, as a small open economy, Canada likely wouldn't be immune if severe global stress were to re-emerge and persist. As we outlined in the FSR, such severe stress could interact with existing vulnerabilities, like high household debt. To make sure the Canadian financial system remains resilient to future stress, proactive adjustments to higher interest rates need to continue. The adjustment so far We know from the data, including those from responses to our surveys, that Canadians are adjusting-and feeling some pressure-as they juggle the combined effects of inflation and higher interest rates. The pace of credit growth among households has slowed considerably since the Bank started raising interest rates. In recent months, household credit growth on a year-overyear basis has been about 3%, the slowest pace since the early 1990s. We've seen a big drop in applications for residential mortgages, while banks' mortgage approval rates remain roughly unchanged. This suggests the slowdown is being driven by a drop in demand for credit rather than by a tightening of lending standards. That lines up with the slowdown we've seen in consumer spending, especially on goods people tend to buy on credit. While households aren't adding to their debt levels as much, some are finding it harder to deal with existing debt. Delinquency rates on credit cards, car loans and unsecured lines of credit have either returned to, or slightly surpassed, pre-pandemic levels. And some households look to be relying more on credit cards: the share of accounts with utilization rates above 90% has been increasing. Delinquency rates on mortgages, meanwhile, are still lower than before the pandemic.4 And, to date, households with mortgages are showing only a modest increase in financial stress related to their non-mortgage debt. For businesses, the pace of credit growth has also slowed. And, as with households, the slowdown appears to be mainly driven by demand.5 Many businesses have seen their debt-servicing costs rise at the same time as their revenue growth has been slowing. However, the data suggest most can still service their existing debt, and while business insolvencies have risen in almost all industries, they are still largely in line with levels seen before the pandemic.6 The banking sector is also adjusting. As interest rates have risen, banks have raised the rates they pay on term deposits, with one-year rates for guaranteed investment certificates reaching above 5%-their highest level in more than 20 years. Depositors 3/5 BIS - Central bankers' speeches have reacted by shifting money from demand deposits into higher-paying term deposits. This is good news for savers, but it also means higher funding costs for banks. And higher funding costs are typically passed on to borrowers. Banks are also keeping larger capital and liquidity buffers than before the pandemic and putting more cash aside to deal with potential credit losses. This helps them prepare for the effects of a slowing economy and is exactly the sort of proactive adjustment we'd expect to see. The adjustment still to come That's the story so far. But more adjustment is coming. A key area we're watching is high levels of fixed-payment mortgage debt. In all, around 40% of mortgage holders have seen higher payments since early 2022. By the end of 2026, virtually all remaining mortgage holders will go through a renewal cycle and, depending on the path for interest rates, may face significantly higher payments. In combination with credit stress indicators, our consumer surveys help us gauge how Canadians are adjusting, or planning to adjust, to higher payments. Many respondents say their mortgage payments are close to or greater than the maximum they could handle without cutting other spending.7 And most say they think the impact of higher interest rates is no more than half done. Despite greater financial pressure though, most mortgage holders still expect they will be able to manage higher payments when they renew. We see a similar dynamic in the responses to our business surveys. In our latest Business Outlook Survey, published in October, just under half of the companies we spoke to said they think the impact of higher interest rates is just beginning for them. Another 30% said they think it is half done.8 Even so, most businesses said they're confident they can manage their debts despite the added pressure. It's early though, and the effects of higher interest rates are still working their way through the economy. We'll need to keep a close eye on both credit stress indicators and survey data to gauge how businesses and households are adjusting. Conclusion It's time for me to wrap up and to hear from all of you. My objective today was not to offer a prediction on the path of interest rates. Rather, what I hoped to do was give you a sense of some of the things that may affect longerterm interest rates and, particularly, to stress the importance of adjusting proactively to a future where interest rates may be higher than they've been over the past 15 years. The Bank will continue to monitor the impact that higher interest rates are having on the economy, and we'll continue to update Canadians on what we are seeing. And we will remain focused on bringing inflation the rest of the way to our 2% target, so that Canadians can save, invest and plan with more certainty. 4/5 BIS - Central bankers' speeches Thank you for listening today. I'm looking forward to a great discussion. I would like to thank Russell Barnett, Claudia Godbout and Louis Morel for their help in preparing this speech. 1 For more information, see Bank of Canada, Financial System Review-2023 (May 2023). 2 P. Beaudry, "Economic progress report: Are we entering a new era of higher rates?" (speech to the Greater Victoria Chamber of Commerce, Victoria, British Columbia, June 8, 2023). 3 International Monetary Fund, Global Financial Stability Report: Financial and Climate Policies for a High-Interest-Rate Era (Washington, DC, October 2023). 4 For more information, see the "Indicators of financial vulnerabilities" page on the Bank's website. 5 The latest data from the Senior Loan Officer Survey are available on the Bank's website. 6 Data from FactSet show that, among publicly traded non-financial corporations, only around 3% of outstanding debt is held by firms whose earnings can no longer cover their interest payments. 7 For more information, see Bank of Canada, Canadian Survey of Consumer Expectations-Third Quarter of 2023 (October 2023). 8 See Bank of Canada, Business Outlook Survey-Third Quarter of 2023 (October 2023). 5/5 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the Standing Senate Committee on Banking, Commerce and the Economy, Ottawa, Ontario, 1 November 2023.
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Tiff Macklem: Opening statement before the Standing Senate Committee on Banking, Commerce and the Economy Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the Standing Senate Committee on Banking, Commerce and the Economy, Ottawa, Ontario, 1 November 2023. *** Good afternoon. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcement and the Bank of Canada's Monetary Policy Report. Last week, we maintained our policy interest rate at 5%. We held our policy rate steady because monetary policy is working to cool the economy and relieve price pressures, and we want to give it time to do its job. But further easing in inflation is likely to be slow, and inflationary risks have increased. Before I take your questions, let me give you some economic and financial context for the decision. Since the last time we were here with you, the Canadian economy has slowed, and the data suggest demand and supply are now approaching balance. We're now seeing clearer evidence that higher interest rates are moderating spending and relieving price pressures. The economy has entered a period of weaker growth, with growth averaging about 1% over the last year. Growth in gross domestic product (GDP) is forecast to remain below 1% for the next several quarters before picking up in late 2024 and rising to 2½% in 2025. With the economy expected to move into excess supply this year and with growth anticipated to be weak for the next few quarters, we think there's more inflation relief in the pipeline. We expect inflation in Canada to ease gradually and return to our 2% target in 2025. But we're worried that higher energy prices and persistence in underlying inflation are slowing progress. The effects of higher interest rates on inflation are most evident in the prices of durable goods, like furniture and appliances that people often buy on credit. These effects have also spread to many semi-durable goods-a category that includes things like clothing and footwear-as well as many services excluding shelter. Inflation in these categories is now running generally at or below 2%. Price increases for groceries, while still elevated at almost 6%, have also eased and are expected to moderate further. However, a number of factors are getting in the way of low inflation. Higher global energy prices are increasing prices at the pump. And that is pushing headline inflation back up. Structural supply shortages in our housing market are boosting prices for shelter. In addition, near-term inflation expectations and wage growth remain elevated, and corporate pricing behaviour is normalizing only slowly. 1/2 BIS - Central bankers' speeches The combined impact of all these pressures on inflation is that we now expect inflation to be about 3½% through to about the middle of next year. As excess supply in the economy increases, inflation should ease in 2024 and reach 2% in 2025. Overall, inflationary risks have increased since July. The forecast we released last week has inflation on a higher path than we expected last summer. In addition, rising global tensions, particularly the war in Israel and Gaza, have increased the risk that energy prices could move higher and supply chains could be disrupted again, pushing inflation up around the world. With clearer evidence that monetary policy is working, my colleagues on the Bank's Governing Council and I judged last week that we could be patient and hold the policy rate at 5%. However, to be confident that our policy rate is high enough to get inflation back to 2%, we need to see more easing in our measures of core inflation. We will continue to assess whether monetary policy is sufficiently restrictive to restore price stability, and we will monitor risks closely. Our decision last week reflected our best efforts to balance the risks of over- and undertightening. 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-and we cannot let high inflation become entrenched in the economy. If inflationary pressures persist, we are prepared to raise our policy rate further to restore price stability. In summary, we have made a lot of progress reducing inflation, but we are not there yet, and we need to stay the course. When price stability is restored, the economy will work better for everyone. With that summary, I would be pleased to take your questions and begin our discussion. 2/2 BIS - Central bankers' speeches
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Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Saint John Region Chamber of Commerce, Saint John, New Brunswick, 22 November 2023.
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Tiff Macklem: Ending the pain of high inflation Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Saint John Region Chamber of Commerce, Saint John, New Brunswick, 22 November 2023. *** Introduction Good afternoon. I'm pleased to be here today and I want to thank the Saint John Region Chamber of Commerce for the invitation. Travelling to different parts of Canada is one of the most important and rewarding things I do because it allows me to see and hear first-hand how economic circumstances are playing out across our vast country. I want to hear about the opportunities and obstacles your businesses face and to understand your perspectives on the economy. I look forward to your questions and our discussion today. I know that for many people, high inflation has made life hard. We hear it at the Bank of Canada in our surveys of consumers. And I hear it directly-I get many letters and emails from Canadians. Too many of these are about the impossibility of keeping up with higher prices. I hear the worry, the frustration, even the desperation in these letters. I also hear from businesses that are being squeezed by higher costs and from workers who need higher wages to keep up with the rising cost of living. Nothing concerns me more than the pain that high and volatile inflation is causing so many Canadians and the broader costs it's imposing on our economy. Inflation has come down from its peak of 8.1%, but it's still too high, and progress is slower than we'd hoped. And I know that even as our interest rate increases are bringing inflation down, to many Canadians they feel like another added cost. Today I want to talk about the high cost of inflation on families, businesses and communities. The pain is real, and inflation is not going away by itself. That's why it is so important that we stay the course and restore price stability. We have already come a long way. And that's the other thing I want to discuss: what's working, and why. I will explain some of the advantages we have in this fight against inflation compared with the past. Higher interest rates are squeezing many Canadians, but these rates are relieving price pressures broadly throughout the economy. If we stay the course, the payoff will be worth it. The harmful impacts of high inflation By the numbers, the Canadian economy has done remarkably well. The COVID-19 pandemic is now behind us, and workers, consumers and businesses have all emerged in much better shape than we feared in 2020. After the deepest and sharpest recession in our history, we had the fastest recovery on record. The job market came roaring back, and even though economic growth has slowed in recent quarters, the unemployment rate is still relatively low at 5.7%. This is where it was just before the pandemic began, when times felt good. The workforce participation rate is high- 1/5 BIS - Central bankers' speeches particularly for women and newcomers-and many of us have taken advantage of new ways of working and new workplace flexibility. Many households have added to their savings despite the rising cost of living. But Canadians are not feeling happy. I hear this first-hand. We hear this in our Canadian Survey of Consumer Expectations. And we see it in other consumer confidence measures and surveys of public sentiment (Chart 1). Usually, consumer confidence is high when unemployment is low, and vice versa. But right now, sentiment is at a recessionary low-as low as it was during the global financial crisis in 2008–09. This is despite the fact that the job market is stronger today and the unemployment rate is lower than it has been for most of the last 40 years. Why is public sentiment so low? There's probably more than one reason. People are weary from the pandemic. Public attitudes are more polarized, reducing the sense of common purpose. Technology is accelerating change, making it harder to keep up. And rising conflicts and climate change are increasing anxiety about the future. These causes are all well beyond the reach of monetary policy. But one factor is clearly our responsibility-inflation. People are angry about high inflation (Chart 2). The rising cost of living is making life harder for everyone, especially Canadians who have less to start with. People are working hard, but their salaries don't buy what they used to. They can't afford the things they need to live. It feels unfair. That feeling of unfairness eats away at the fabric of society. There's more disagreement. One metric where we can see this is the amount of time lost to labour strikes and work stoppages (Chart 3). With higher inflation in the last couple of years, we're seeing more strikes as employers and workers struggle to reconcile rising costs on each side. Nobody wants this-workers don't want to strike, and employers don't want work to stop. But high and unpredictable inflation makes it difficult to agree on fair compensation for work, and that leads to strikes. When inflation is high and volatile, contracts get shorter, negotiations are harder, and uncertainty is higher for everybody. Businesses have also changed the way they price their goods and services, raising prices more often and by larger amounts. That hurts their relationships with customers, raising suspicion and blame. For all these reasons, inflation makes people unhappy. In our most recent consumer survey, almost 9 out of 10 respondents said they feel worse off due to high inflation. Almost no one said they benefit (Chart 4). And inflation is changing behaviour. We can see in our surveys that families are changing their spending to protect themselves from inflation. They're spending less and trying to find cheaper goods and services (Chart 5). 2/5 BIS - Central bankers' speeches This is particularly difficult for lower-income Canadians. When people are spending more of their income on necessities, it's hard to shift what they need to buy, and they have little savings to buffer higher prices. Moreover, necessities-food and rent-have had some of the fastest price increases over the past few months. Canadians on fixed pensions are also particularly affected because they are not receiving any increase in their income to compensate for higher prices. What happened in the 1970s We have seen inflation and the unhappiness it brings before. Indeed, what we're feeling today is reminiscent of the 1970s. I was a teenager in the 1970s. For those of you who are too young to remember, inflation in the 1970s was high and variable. It averaged more than 7% for the decade and peaked at nearly 13%. Then, as now, global forces ignited the run-up in prices. A global food shortage and the Organization of the Petroleum Exporting Countries' oil embargo in 1973 caused inflation to rise quickly. My impression as a teenager was that inflation made everyone angry. There were a lot of labour strikes in the 1970s. Many were long and heated. People felt ripped off because they would get what looked like a good pay raise, but their money didn't buy what it used to because prices were higher. To get inflation down in the 1970s, policy-makers tried a few things, including price and wage controls as well as monetary targeting-slowing the growth of the money supply. Unfortunately, these policies were ineffective. And the government and central bank weren't willing to stay the course-to restrain government spending and tighten monetary policy enough to wring inflationary pressures out of the economy. So Canadians lived with high inflation for more than a decade. By the time policy-makers realized they needed more forceful action, inflation was entrenched in the economy. When businesses, workers and consumers all expect high inflation, it is harder than ever to bring it down. It took very high interest rates and a deep recession to break inflation. In 1981, the policy rate reached 21% and mortgage rates were even higher (Chart 6). In 1982, the unemployment rate hit 13.1%. Advantages we have this time around That brings me to what's different today, and why I am confident we will get back to low inflation more quickly and at lower economic cost than we did in the 1970s. We have learned the bitter lessons from that time. And we've got some distinct advantages this time around: an inflation target with a strong track record and a forceful and sustained response. Let me start with our inflation target. We began targeting inflation more than 30 years ago. Since 1995, our inflation target has been 2%, the middle of the band of 1% to 3%. Between then and when the pandemic hit in 2020, inflation averaged 1.9% and was within that band 80% of the time-a remarkable success compared with the 1970s and 1980s (Chart 7). For more than 25 years, Canadians benefitted from low, stable and predictable inflation. People understood that when inflation got too high, we'd raise the policy rate to slow 3/5 BIS - Central bankers' speeches demand. When inflation slumped, we'd lower the policy rate to stimulate demand and growth. That track record and stability allowed households and businesses to budget their spending and savings, confident that the purchasing power of their money was not going to diminish substantially. Canadians came to expect that prices overall would rise only about 2% a year. As a result, competitive forces were working. Businesses were cautious about raising their prices. There was less disagreement, fewer strikes and less labour force disruption. And the economy was more stable and better able to weather adverse shocks. That track record matters. Even though inflation rose above 8% last year, and even though it is still above our target, long-term inflation expectations have remained well anchored. It's not all smooth sailing: expectations for near-term inflation rose with inflation and have been slow to come down. This is a concern, and we want to see expectations decline to be reassured we are headed back to our 2% target. But the fact that long-term expectations remain consistent with the 2% target means Canadians believe we will bring inflation back to target-as we have for 30 years. The 1970s showed us the very high cost of entrenched inflation, and we know we need to avoid that danger this time around. That brings me to the second advantage we have. This time we responded forcefully to high inflation from the start and are resolute in our commitment to complete the job. We began increasing rates in March 2022 and raised our policy rate by more than 4 percentage points in eight consecutive steps, including a 100-basis-point increase in July 2022. After our rate increase in January of this year, we paused to take stock. We were clear when we held our rate steady in March and April that we were using this pause to assess whether we had raised interest rates enough to get inflation back to target. When we saw the downward momentum in underlying inflation stall, we raised rates twice more, in June and July, bringing the policy rate to its current 5%. This tightening of monetary policy is working, and interest rates may now be restrictive enough to get us back to price stability. But if high inflation persists, we are prepared to raise our policy rate further. By responding forcefully, we've cooled our overheated economy and taken the steam out of inflation. We also moved quickly to avoid the need for even higher interest rates later-because experience has shown that the slower that monetary policy adjusts to high inflation, the more tightening will ultimately be required.1 This is what happened in the 1970s-slower action meant even higher interest rates and a sharper economic slowdown as a result. We don't want to repeat that mistake. The economy is slowing now, with growth in gross domestic product near zero over the past several months. The economy is approaching balance, and inflation has fallen from 8.1% in June of 2022 to 3.1% last month. We expect the economy to remain weak for the next few quarters, which means more downward pressure on inflation is in the pipeline. In short, the excess demand in the economy that made it too easy to raise prices is now gone. 4/5 BIS - Central bankers' speeches We know that the higher interest rates that are working to bring inflation down are making things difficult for many Canadians. And slow growth doesn't feel great. But the alternative-years and years of high inflation and then a deep recession -is much worse. When we get through this period of slow growth and inflation is back to the 2% target, Canadians will once again be able to budget and invest with confidence, prices will be stable and predictable, and the economy will work better for everyone. Conclusion It's time for me to conclude. The past two years have been a painful reminder of how much high inflation hurts households, businesses and communities. It's our common enemy-not only because it creates financial pain and social upheaval, but also because no one wins when inflation is high and volatile. We all want to see high inflation defeated. The lesson from the 1970s is that fighting inflation half-heartedly and living with the stress, labour strife and uncertainty inflation can cause would be a huge mistake. The right way to respond is with a firm commitment to restoring price stability. But we don't want to avoid one mistake only to overdo it on the other side. We are trying to balance the risk of over- and under-tightening. If we do too much, we risk making economic conditions unnecessarily painful for everyone. If we do too little, Canadians will continue to endure the harm of inflation and we will likely have to raise interest rates even higher later. To return to low inflation and stable growth in the years ahead, we need these higher interest rates and slow growth in the short term. Our inflation target, our track record and our forceful response will get us through to the other side. We're well on our way, and we need to stay the course. Thank you. I would like to thank Daniel de Munnik and Brigitte Desroches for their help in preparing this speech. 1 Bank for International Settlements, Annual Economic Report 2022 (June 2022). 5/5 BIS - Central bankers' speeches
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Remarks by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, at the Windsor–Essex Regional Chamber of Commerce, Windsor, Ontario, 7 December 2023.
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Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Canadian Club Toronto, Toronto, Ontario, 15 December 2023.
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Tiff Macklem: The path to price stability Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Canadian Club Toronto, Toronto, Ontario, 15 December 2023. *** Introduction Good afternoon. It's a great pleasure to be back in Toronto for my final speech of the year. I want to thank the Canadian Club Toronto for the invitation and all of you for joining me today. I look forward to our discussion and to hearing from as many of you as possible. As the year ends, I can't help but reflect on the year that was and think about the year ahead. We've come a long way toward restoring price stability. This was our second year of monetary policy tightening, and that work is paying off. The economy is no longer overheated, and that is relieving inflationary pressures. Inflation has come down from just over 8% in the middle of last year to 3.1% in October. That's significant progress. But to many Canadians, I know it doesn't feel great. We are in a tough phase of the monetary cycle. Inflation has come down but it's still too high. And the increases in interest rates that are needed to relieve price pressures are squeezing many Canadians. Looking ahead, I expect 2024 to be a year of transition. The effects of past interest rate increases will continue to work through the economy, restraining spending and limiting growth and employment. Unfortunately, this is what's needed to take the remaining steam out of inflation. But this period of weakness will pave the way to a more balanced economy. We expect growth and jobs to be picking up later next year, and inflation will be getting close to the 2% target. And once Governing Council is assured that we are clearly on a path back to price stability, we will be considering whether and when we can lower our policy interest rate. I know it is tempting to rush ahead to that discussion. But it's still too early to consider cutting our policy rate. Until we see evidence that we are clearly on a path back to 2% inflation, I expect Governing Council will continue to debate whether monetary policy is restrictive enough and how long it needs to remain restrictive to restore price stability. In a world with increased macroeconomic volatility, we are also conscious that we may need to be nimble, and we should be humble about our forecasts. Looking beyond next year, we also need to be thinking about what the post-pandemic normal will look like. In the past few years, the Canadian and global economies have experienced enormous volatility. And while the pandemic is behind us, wars, geopolitical tensions, climate risks and high debt levels all pose new challenges. Against this background, it's critical that we learn from the high inflation we've seen 1/7 BIS - Central bankers' speeches since the pandemic so that we can come out of this difficult period better prepared for what lies ahead. These are the themes I want to talk about today. First, I'll look ahead to what you can expect from the economy in the coming year. Then I'll explain what to expect from the Bank of Canada as we complete the journey back to price stability. We'll never have a crystal ball, but the experience of recent years does have some important lessons. We've learned some things and we are adjusting-I'd like to tell you how. What to expect in the next year Let me start with the outlook. We're working on our new forecasts and we'll release our full updated economic projections in late January. But we have a good idea of the broad picture. Economic growth stalled through the middle of this year, and we expect it to remain weak into 2024. The excess demand that drove prices higher over the past two years is now gone, as higher interest rates and tighter global financial conditions have helped the economy rebalance. With the cost of living still increasing too quickly, and with growth subdued, the next two to three quarters will be difficult for many. Consumers will continue to hold back on spending. Businesses will see weak demand and employment will grow more slowly than the labour force, which means the unemployment rate will likely increase further. That brings me to the inflation outlook. As growth slows, inflation pressures will ease. But we can't rule out bumps along the way. We already have clear evidence that higher rates are bringing inflation down. Inflation for durable and semi-durable goods-things like furniture and appliances, and clothing and footwear-is now below 2%. Increases in the cost of services excluding shelter is just over 2%. That's pretty normal. What's not normal is inflation in the prices of food and non-durable goods and in shelter costs. Food price inflation has eased but is still about 5½%. That's hurting everyoneespecially lower-income Canadians. Inflation in the prices of non-durable goods excluding food and energy-things like cleaning supplies or personal care items-is running about 4½%. And inflation in the cost of shelter services has risen to almost 7%. Taken together, these three categories of goods and services make up almost half of the consumer price index basket. So it's no wonder people are still feeling the pressure of rising prices. Unless the pace of price increases in these big categories slows, it's going to be hard to get overall inflation down to the 2% target. The first two show some promise. Food price inflation should decline further as lower agriculture prices and transportation costs get passed through to the prices of groceries. And slowing demand should moderate non-durable goods price inflation. This leaves shelter price inflation. Why is shelter price inflation rising even as the economy slows? Part of the reason is that our higher policy interest rate is increasing mortgage interest costs. This is not unexpected nor unusual. What is unusual is that the other components of shelter costs-like rent and maintenance-are also high, with rent up 2/7 BIS - Central bankers' speeches 8.2% in October. This strength in shelter price inflation appears to be related to the structural lack of supply of housing. Canada's housing supply has not kept up with the growth in our population, and higher rates of immigration are widening the gap. Increases in interest rates are moderating the demand for housing and bringing the housing market into better balance, but the structural undersupply of housing means that inflationary pressures on shelter prices remain elevated. We do expect shelter price inflation to moderate over time, but predicting the timing is difficult. So what's the bottom line? Over the coming months, you should expect to see some push and pull on inflation as the cooling economy reduces price pressures while other forces continue to exert upward pressure. That's why further declines in inflation will likely be gradual. When it's clear that inflation is on a sustained downward track, we can begin discussing lowering our policy interest rate. We don't need to wait until inflation is all the way back to the 2% target to consider easing policy, but it does need to be clearly headed to 2%. Of course, we can't rule out new surprises. There are some obvious candidates. We could see an escalation of war in Europe or the Middle East, or new geopolitical tensions that divert trade and investment and disrupt supply chains. Climate events have become more frequent and more extreme both at home and abroad, and their fallout often pushes prices up. All these risks mean we need to be vigilant and ready to adjust as needed. But looking at the year behind us is a good reminder of how far we've come. The 2% inflation target is now in sight. And while we're not there yet, the conditions increasingly appear to be in place to get us there. The economy is no longer in excess demand, and underlying inflationary pressures are easing in much of the economy. We still need to see more downward momentum in core inflation, and we will be watching the demandsupply balance, wage growth, corporate pricing behaviour and inflation expectations closely as we assess where we are on the path to price stability. What you can expect from the Bank of Canada Lessons learned We are learning from the volatility of the past few years. If we take on board the lessons we've learned, we can come out of this monetary cycle better equipped than when we went into it. In my year-end speech last December, I talked about some of the lessons from the high inflation that followed the pandemic. I highlighted three. It's a lot easier to restore demand than supply. Supply problems have a much bigger effect on inflation when the economy is overheated. And to better identify emerging inflationary pressures, we need to look beyond the aggregate economy and understand sectoral pressures. 3/7 BIS - Central bankers' speeches Today I want to add two more lessons. The first one we've had to re-learn. Inflation is painful. It harms Canadians and it harms the economy. It makes people angry and it tears at the fabric of society. I talked about this three weeks ago in Saint John, so I can be brief here. An overwhelming majority of Canadians say high inflation has made them feel worse off and almost nobody feels better off. It's a reminder of the bitter experience through the big inflation of the 1970s. In the past two years, a new generation of Canadians has experienced the pain of inflation for the first time, and we've relearned that inflation is our common enemy. Second, we've learned how valuable public trust is in the fight against inflation. We didn't have this trust in the 1970s and it proved very difficult to get inflation back down. This time, trust, combined with our forceful monetary policy response, has kept longerrun inflation expectations anchored on the 2% target, and inflation is coming down with less short-term economic cost. To keep the trust we have and to restore what trust we've lost because inflation has been too high for the past two years, we must improve transparency and communicate more clearly and more broadly. Taking these lessons on board We are taking these lessons to heart. They're informing our work and our policy decisions. This brings me to what you can expect from the Bank of Canada as we work to restore and maintain price stability. First, you can expect us to stay the course and get inflation back to the 2% target. Second, we're enhancing our tools and analysis to better assess and respond to inflation, amid uncertainty and increased economic volatility. And third, we are continuing to listen more and communicate better, reaching more Canadians where they want to get their information. Let me take each of those in turn. We're committed to getting inflation back to 2%-and for good reason. At that level, inflation is low enough that people don't need to worry about changes in their cost of living from one year to the next. The economy works better when inflation is low and stable-there's more competition, less disagreement about wages and prices, and greater stability. Some have argued that it's too difficult to get back to 2%. Why not settle for 3%? But you don't raise the target just because you missed it. We've been targeting 2% inflation since 1995, and it anchors our economic and financial system. If you change the anchor when the going gets tough, you don't really have an anchor, and inflation itself gets less predictable and more volatile. Simply put, price stability centred on our 2% target is the best contribution the Bank of Canada can make to a healthy economy and the financial well-being of Canadians. We are also committed to enhancing our tools and analysis. We don't expect the next few years to be as volatile as the last few have been. But increasingly, leading central 4/7 BIS - Central bankers' speeches bankers and economists see a future with more supply disruptions and more shifts in economic relationships and breaks in the connections we take for granted.1 This underlines the importance of learning from past experience. In particular, we need to pay more attention to the supply side and develop analytic tools that are better equipped to address breaks and shifts. This work is underway and already providing new insights. We have invested in new sources of data to get a more granular picture of supply and demand across sectors and households. This includes a new digital Business Leaders' Pulse survey focused on small and medium-sized businesses, broader analysis of labour market indicators, and the capacity to analyze very large datasets such as anonymized Canadian mortgage data. We have also developed more detailed indicators of supply chain bottlenecks, and we are continuing to evaluate new data sources.2 We are also adapting our economic models so they have the flexibility to accommodate economic shifts. During the pandemic shock and recovery, the main drivers of growth and inflation shifted-but our models generally reflected past economic relationships. We're working to develop the next generation of models for monetary policy that allow for more changes in behaviour and provide greater flexibility to consider alternative risk scenarios.3 Finally, we're committed to constantly strengthening our decision-making process and improving our communications. We want diverse perspectives. We want to listen more, reach out more and connect with more Canadians. Many of these changes are well advanced. Earlier this year, we adjusted Governing Council by bringing in an external, non-executive Deputy Governor for a term of two years. We did this because we want to bring more diverse perspectives into our policy-making.4 This year we also began publishing a summary of deliberations to provide more insight into Governing Council's monetary policy decisions.5 We have also been providing more plain language summaries and short video clips on social media to explain our decisions and the outlook for the economy.6 And Governing Council is visiting communities across our vast country to listen to Canadians and explain the work of the Bank. You'll see more of this in 2024. Beginning in 2024, we'll also hold a news conference after every policy decision. We want households, businesses and communities to understand the actions we are taking and why. Taking questions at every decision is part of my commitment to explain our actions. Conclusion It's time for me to conclude. We have come a long way in 2023, and by the time I give my year-end speech next year, I expect the economy will be growing, business hiring plans will be expanding, and inflation will be getting close to the 2% target. Of course, predicting the future is difficult. It could be harder than we think to get inflation down. We know that we will need to remain vigilant. 5/7 BIS - Central bankers' speeches But the progress we've made in restoring price stability is considerable and it's real. When I gave my year-end speech last year in Vancouver, the latest inflation reading was 6.9%. Today it's less than half that, and further reductions in inflation are in the pipeline. This progress has not been without cost. Many Canadians are feeling squeezed by higher interest rates. At the Bank, we are doing our best to balance the risks of overand under-tightening. But if we learned anything from the bitter experience with inflation in the 1970s, the biggest mistake would be to waver in our resolve to control inflation and lose the public's trust. The inflation surge that has hit Canada and the world in the last two years has taught us some important lessons. We are taking these lessons on board, and we will continue to learn and adapt, guided by our commitment to delivering price stability for Canadians. Thank you. I would like to thank Daniel de Munnik and Brigitte Desroches for their help in preparing this speech. 1 See, in particular, A. Carstens, "A story of tailwinds and headwinds: aggregate supply and macroeconomic stabilisation" (speech to the Jackson Hole Economic Symposium, Jackson Hole, Wyoming, August 26, 2022) and C. Lagarde, "Policymaking in an age of shifts and breaks" (speech to the Jackson Hole Economic Symposium, Jackson Hole, Wyoming, August 25, 2023). 2 See Bank of Canada, Business Outlook Survey-Third Quarter of 2023 (October 2023) for results from the most recent Business Outlook Survey and Business Leaders' Pulse. For details about updated labour market benchmarks, see E. Ens, K. See and C. Luu, " Benchmarks for assessing labour market health: 2023 update," Bank of Canada Staff Analytical Note No. 2023-7 (May 2023). For a new mortgage analysis, see Bank of Canada, Financial System Review-2023 (May 2023). Additionally, see O. Kryvtsov, J. C. MacGee and L. Uzeda, "The 2021–22 Surge in Inflation," Bank of Canada Staff Discussion Paper No. 2023-3 (January 2023); O. Bilyk, T. Grieder and M. Khan, " Markups and inflation during the COVID-19 pandemic," Bank of Canada Staff Analytical Note No. 2023-8 (June 2023); P. Bouras, C. Bustamente, X. Guo and J. Short, "The contribution of firm profits to the recent rise in inflation," Bank of Canada Staff Analytical Note No. 2023-12 (August 2023); R. Asghar, J. Fudurich and J. Voll, "Firms' inflation expectations and price-setting behaviour in Canada: Evidence from a business survey," Bank of Canada Staff Analytical Note No. 2023-3 (February 2023); and S. Birinci, Y. Park, T. Pugh and K. See, "Uncovering the Differences Among Displaced Workers: Evidence from Canadian Job Separation Records," Bank of Canada Staff Working Paper No. 2023-55 (October 2023). 3 See D. Coletti, "A Blueprint for the Fourth Generation of Bank of Canada Projection and Policy Analysis Models," Bank of Canada Staff Discussion Paper No. 2023-23 (October 2023). 6/7 BIS - Central bankers' speeches 4 See Bank of Canada, "Bank of Canada announces appointment of non-executive Deputy Governor," press release (January 16, 2023). 5 See Bank of Canada, Summary of Governing Council deliberations (2023). 6 See Bank of Canada, "Lessons learned and looking ahead", speech summary (December 2023). 7/7 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 24 January 2024.
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Tiff Macklem: Release of the Monetary Policy Report Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 24 January 2024. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's policy announcement and the Bank of Canada's Monetary Policy Report (MPR). Today, we maintained our policy interest rate at 5%. We are also continuing our policy of quantitative tightening. Our message today 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. But inflation is still too high, and underlying inflationary pressures persist. We need to give these higher rates time to do their work. Second, with overall demand in the economy no longer running ahead of supply, 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. Global growth has slowed, but not quite as much as we thought it would, largely because of the surprising resilience of the US economy. Inflation is easing in most major economies, but it remains too high and is not expected to reach central banks' targets until 2025. In Canada, economic growth stalled in the middle of 2023. For many Canadians, the combination of higher prices and higher interest rates has been difficult. But 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 consumer price index (CPI) components that are rising faster than 3% has declined substantially and should continue to normalize. But 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 interest costs, higher rents and other housing costs. And while food prices are not increasing as fast as they were, food inflation is still about 5%. 1/3 BIS - Central bankers' speeches 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 are likely to be gradual and uneven. That suggests the path back to our 2% target will be slow, and risks remain. Overall, our outlook for both growth and inflation is largely unchanged from the October Report. Economic growth is expected to be modest in 2024-weak in the first half before picking up around the middle of the year and rising to about 2½% 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 this year. It is then expected to ease to about 2½% by year end and return to target in 2025. In two weeks, we will release our summary of deliberations, which provides more detail about our deliberations. But let me give you a sense of our discussion. As always, Governing Council focused on the decision at hand-the current policy rate. And there was a clear consensus to maintain our policy rate at 5%. We did, of course, discuss where we see the economy and inflation going and what that could mean for monetary policy going forward. What came through in the deliberations is that Governing Council's discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance. That doesn't mean we have ruled out further policy rate increases. If new developments push inflation higher, we may still need to raise rates. But what it does mean is that if the economy evolves broadly in line with the projection we published today, I expect future discussions will be about how long we maintain the policy rate at 5%. Governing Council is concerned about the persistence of 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 are 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. 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. 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. 2/3 BIS - Central bankers' speeches With that summary, the Senior Deputy Governor and I would be pleased to take your questions. 3/3 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 1 February 2024.
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Tiff Macklem: Opening statement before the House of Commons Standing Committee on Finance Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 1 February 2024. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcement and the Bank of Canada's Monetary Policy Report. 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. But inflation is still too high, and underlying inflationary pressures persist. We need to give these higher rates time to do their work. Second, with overall demand in the economy no longer running ahead of supply, 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 interest rates has been difficult. But 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 consumer price index (CPI) components that are rising faster than 3% has declined substantially and should continue to normalize. But 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 interest costs, higher rents and other housing costs. And while food prices are not increasing as fast as they were, food inflation is still about 5%. Finally, inflation in services excluding shelter has improved, but there are signs that price pressures remain. 1/2 BIS - Central bankers' speeches All this push and pull on inflation means that further declines in inflation are likely to be gradual and uneven. That suggests the path back to our 2% target will be slow, and risks remain. Overall, our outlook for both growth and inflation is largely unchanged from when we were here in October. Economic growth is expected to be modest in 2024-weak in the first half before picking up around the middle of the year and rising to about 2½% 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 this year. It is then expected to ease to about 2½% by year end and return to target in 2025. Let me give you a sense of Governing Council's monetary policy deliberations. At our decision last week, there was a clear consensus to maintain our policy rate at 5%. We also discussed where we see the economy and inflation going and what that could mean for monetary policy going forward. What came through in the deliberations is that Governing Council's discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance. That doesn't mean we have ruled out further policy rate increases. If new developments push inflation higher, we may still need to raise rates. But what it does mean is that if the economy evolves broadly in line with the projection we published last week, I expect future discussions will be about how long we maintain the policy rate at 5%. Governing Council is concerned about the persistence of 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 are 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. 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. 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, I would be pleased to take your questions and begin our discussion. 2/2 BIS - Central bankers' speeches
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Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Montreal Council on Foreign Relations, Montreal, Quebec, 6 February 2024.
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 6 March 2024.
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Tiff Macklem: Monetary Policy Decision Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 6 March 2024. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's policy announcement. This is the first time we're speaking to you on the day of a policy decision that is not accompanied by a Monetary Policy Report (MPR), so it's a little different than what we're all used to. We want households, businesses and communities to understand the actions we are taking and why. So we'll be answering questions at every decision as part of our commitment to keep Canadians informed. Our quarterly MPRs include a full economic outlook. Our deliberations this time were based on how the economy and risks to the outlook have evolved compared with what we expected in January. In the six weeks since our January decision, there have been no big surprises. Economic growth has remained weak, and inflation has eased further as higher interest rates restrain demand and relieve price pressures. But with inflation still close to 3% and underlying inflationary pressures persisting, the assessment of Governing Council is that we need to give higher rates more time to do their work. With that in mind, Governing Council decided to maintain the policy interest rate at 5%. We are also continuing our policy of quantitative tightening. In January, we indicated that our confidence had increased that our policy rate was high enough to restore price stability. While we could not rule out the need to raise rates further if there were new inflation surprises, we indicated that our discussions were shifting from whether our policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level. Today's decision reflects Governing Council's assessment that a policy rate of 5% remains appropriate. It's still too early to consider lowering the policy interest rate. Recent inflation data suggest monetary policy is working largely as expected. But future progress on inflation is expected to be gradual and uneven, and upside risks to inflation remain. Governing Council needs to see further and sustained easing in core inflation. Before taking your questions, let me take a moment to discuss how the economy is evolving. Global growth has slowed and inflationary pressures have continued to ease. The US economy also slowed but has remained surprisingly strong even as inflation has continued to decline. 1/2 BIS - Central bankers' speeches In Canada, economic growth has come in somewhat stronger than projected in the January MPR, but the pace remains weak and below potential. Growth in the second half of 2023 was close to zero, allowing supply to catch up to demand. Labour markets have continued to ease gradually. With employment growing more slowly than population, the labour market has come into better balance. Job vacancies have returned to more normal levels, and the pace of hiring has been modest. Wage growth has been in the 4%-5% range for a while, but there are now some signs that wage pressures may be easing. Consumer price index (CPI) inflation eased to 2.9% in January. This largely reflected lower energy prices, an easing in food price inflation, as well as weakness in semidurable prices like footwear and clothing. But shelter price inflation remains elevated and is still the biggest contributor to overall inflation. More broadly, underlying price pressures persist. Our preferred measures of core inflation eased in January but remain above 3% on a year-over-year and three-month basis. As well, the share of CPI components rising faster than 3% declined but is still above the historical average. Looking ahead, we continue to expect inflation will be close to 3% through the middle of the year before easing in the second half. Gasoline prices are expected to continue to add volatility to inflation in coming months, and shelter price pressures are likely to persist. In other words, the path back to our 2% target will be slow, and progress is likely to be uneven. Governing Council also discussed the risks to the economy and inflation. Risks to global energy prices and transportation costs related to conflicts remain elevated. Domestically, inflation could prove more persistent than expected. We don't want to keep monetary policy this restrictive for longer than we have to. But nor do we want to jeopardize the progress we've made in bringing inflation down. Governing Council remains concerned about the persistence of underlying inflation, and we want to see a further deceleration in core inflation in the coming months. We remain focused on the indicators of inflationary pressures that we've mentioned before. Demand pressures have eased, and the economy now looks to be in modest excess supply. With the labour market coming into better balance, we are looking for further evidence that wage growth is moderating. Before our April decision, we will also get new information on corporate pricing behaviour and inflation expectations. We will be looking for the frequency and size of price increases to continue to normalize and for short-term inflation expectations to ease further. We've come a long way in our fight against high inflation. Monetary policy is workinginflation is coming down. But it's too early to loosen the restrictive policy that has gotten us this far. Low, stable inflation is a cornerstone of shared prosperity, and we remain resolute in our commitment to restore price stability. With that summary, the Senior Deputy Governor and I would be pleased to take your questions. 2/2 BIS - Central bankers' speeches
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Remarks by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, to the CFA Society Toronto, Toronto, Ontario, 21 March 2024.
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Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, to Halifax Partnership, Nova Scotia, 26 March 2024.
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Carolyn Rogers: Time to break the glass - fixing Canada's productivity problem Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, to Halifax Partnership, Nova Scotia, 26 March 2024. *** Introduction Good morning. Canada's economy was built by trade and immigration. Halifax is not just a key port-it has also been the landing spot for countless new Canadians. So I'm glad to be here, speaking to a group like the Halifax Partnership, which is dedicated to helping Canadian businesses grow and thrive. We've just passed the fourth anniversary of the start of the COVID-19 pandemic. It's been four difficult years. Beyond its human toll, the pandemic upended economies around the world and sparked the biggest global inflationary episode in decades. This led central banks-including the Bank of Canada-to raise interest rates sharply so that we could get inflation under control. For the past two years or so, the Bank's Governing Council has focused on restoring price stability. That's almost all we've talked about in our speeches. And we've heard directly from Canadians who have struggled with inflation and who are feeling the impacts of higher interest rates. The good news is that monetary policy is working, and inflation has come a long way down. We're not all the way back to target, and we know we need to finish the job. But we have made a lot of progress. And so it's a good time to reflect on how the economy has changed in Canada and around the world and to think about what those changes mean for the future. When we look ahead, we see a future where inflation may be more of a threat than it has been over the past few decades. We know that many of the forces that helped create a benign environment for inflation in the past, such as globalization, are going to fade away, or even reverse. We know that changing demographics and the economic impacts of climate change will tend to put upward pressure on prices. Persistent global trade tensions also raise the risk of future inflation. So, at the Bank of Canada, we're turning our thoughts-as well as our speeches-to this future. And today I want to talk about a topic that is critical to our ability to navigate a future that's more prone to inflation: productivity. Productivity is a way to inoculate the economy against inflation. An economy with low productivity can grow only so quickly before inflation sets in. But an economy with strong productivity can have faster growth, more jobs and higher wages with less risk of inflation. That's why I want to talk about Canada's long-standing, poor record on productivity and show you just how big the problem is. You've seen those signs that say, "In emergency, break glass." Well, it's time to break the glass. 1/6 BIS - Central bankers' speeches Canada's labour productivity eked out a small gain at the end of last year, according to Statistics Canada. But that came after six straight quarters where productivity fell. Of course, the pandemic was a major disruptor for the economy. During the pandemic, the resourcefulness and ingenuity of Canadian business leaders was put to full use. Companies adjusted their business models and ways of working. Given how nimble companies were, we thought productivity would improve coming out of the pandemic as firms found their footing and workers trained back up. We've seen that happen in the US economy, but it hasn't happened here. In fact, the level of productivity in Canada's business sector is more or less unchanged from where it was seven years ago. People have been sounding the alarm, but it can be hard to feel a sense of urgency about an abstract concept like productivity. Most people, when they hear that we need to improve productivity, think they're being told they have to work harder or work longer hours to produce more, or maybe take less time off. That's not the case. Labour productivity measures how much an economy produces per hour of work. Increasing productivity means finding ways for people to create more value during the time they're at work. This is a goal to aim for, not something to fear. When a company increases productivity, that means more revenue, which allows the company to pay higher wages to its workers without having to raise prices. Ultimately, higher productivity helps the economy generate more wealth for everyone. The bottom line is that the benefits from raising productivity are there no matter what your role is: for workers, for businesses and, yes, for central bankers, too. I'll come back to this point later. First, I'm going to spend some time today spelling out the factors that determine productivity. I'll review Canada's record for clues about how we can improve, and I'll talk about what we can all do to raise Canada's productivity and make our economy more resilient. Ingredients of productivity, and Canada's record Economists will tell you that three factors determine how productive an economy's workforce is: capital intensity, labour composition and multifactor productivity. These are the types of words that often lead non-economists to tune out. But they're important, and once you get past the jargon, they're not that complicated. So, let's look at each one. Capital intensity is about equipping workers with better tools. If you run a snow-clearing business, your workers will be able to clear more driveways if they have solid shovels that don't break easily. Of course, give them a snow blower and they'll be able to clear many more driveways than with just shovels. Invest in pickup trucks with plows, and they can do even more. The most natural way to think about capital intensity is in physical terms like machinery, but of course some of the biggest advances in productivity have come through improvements in computing power and the ability to use and move information. The smartphone in your pocket has way more computing power than the spaceship that first 2/6 BIS - Central bankers' speeches took humans to the moon. These advances continue to put more capability in the hands of employees, giving them the ability to be more productive across a wide range of industries, whether goods or services. Labour composition in an economy measures the skill level of people in the labour force and how much training they receive. The more skills people have and the more training they receive, the more value they can generate on the job. Finally, there's multifactor productivity, which measures how efficiently capital and labour are being used. This can refer to intangibles such as how much competition a company faces, economies of scale, management practices and many others. It can also refer to how well companies are taking advantage of technologies such as machine learning and generative artificial intelligence. Those are the ingredients of productivity. Now, when people measure productivity in an economy, they are looking either at its level-how much value an economy is producing for every hour worked-or at the growth rate of that productivity. Canada has been struggling on both measures for a while. Back in 1984, the Canadian economy was producing 88% of the value generated by the US economy per hour. That's not great. But by 2022, Canadian productivity had fallen to just 71% of that of the United States. Over this same period of time, Canada also fell behind our G7 peers, with only Italy seeing a larger decline in productivity relative to the United States. Improving productivity in Canada needs to be a priority for everyone, and there are two basic strategies for doing it. One is to have the economy focus more on the industries that add greater value than less-productive activities. The other strategy is to keep doing the jobs we're doing but do them more efficiently. Ideally, Canada would use both strategies, leading to an economy with strong productivity growth and a large concentration of high-value industries. Unfortunately, Canada's recent record isn't very good on either front. That may seem strange. After all, Canada is known for some high-value industries, such as energy and aerospace. But while the level of productivity here is high, the growth rates aren't necessarily strong. At the same time, some industries in Canada have shown pretty good productivity growth over the past couple of decades.1 But these include sectors such as retail and wholesale trade, which tend not to generate the same amount of output per worker as sectors like energy or aerospace. I want to be clear here. Improving productivity doesn't mean shutting down whole sections of the economy and telling workers they have to go learn new sets of skills. It means paying attention to where the future high-value industries are coming from. We need to ensure that the right incentives are in place to allow companies in these industries to grow and thrive. And they need the right supports, such as access to markets and financing. I expect this resonates with you here in the room. History shows that advances in productivity often come from the start-ups, the new companies led by entrepreneurs with groundbreaking ideas. Organizations such as the Halifax Partnership and other 3/6 BIS - Central bankers' speeches incubators are encouraging the companies that can lead us to the next great breakthrough in productivity. And you can see examples across the region, particularly in the clean tech, ocean tech and agritech sectors. How to improve I want to turn now to what we can do to improve Canada's productivity. Many studies have looked at this issue over the years, and there's still no consensus about the causes of Canada's poor performance and where policy-makers should put their energies first. But we can't afford to wait for complete certainty. There is much we can all be doing to boost productivity. In fact, if I took the time to drill down into every potential priority, this breakfast speech would become a lunch speech, too. So I'm going to focus on three key areas. The first is labour composition, or the skills workers bring to the job. For existing workers, improvement here means having access to training and reskilling programswhether it's learning how to use new workplace technologies or gaining skills that can create opportunities to switch to a whole new job. For new entrants to the workforce, we're counting on colleges, universities and apprenticeship programs to prepare students for current and future jobs. It's also important to acknowledge that Canada's workforce is expanding at a recordsetting pace, with immigration driving this increase. In January, the working-age population grew by over 125,000 people. That's the fastest single month of workforce growth on record. In the future, Canada's productivity-and our standard of living-will depend importantly on how well we leverage and develop the skills of these new workers. Too often, new Canadians are working in jobs that don't take advantage of the skills they already possess. And too often these people wind up stuck in low-wage, lowproductivity jobs. Doing better at matching jobs and workers is crucial to the future of Canada's economy. The second key area relates to multifactor productivity. We know that small and medium-sized companies tend to lack the economies of scale that allow larger firms to become more productive. And Canada has proportionally more of these smaller firms than many other economies do. Removing disincentives to growth is always a good idea. But if I had to pick the biggest concern in this area, I'd say it's competition. Simply put, businesses become more productive when they're exposed to competition. Competition drives companies to become more productive by innovating and by finding ways to be more efficient. In doing so, competition can make the whole economy more productive. Canada's economy features many sectors where companies face limited levels of competition, whether from firms in other provinces, foreign rivals or new entrants. Of course, every country has certain sectors that it champions, and there can be valid reasons to protect local businesses. However, too much protection can lead to problems. It can also help to explain Canada's weak record in business investment. This brings me to the third area for improving productivity. The need for investment 4/6 BIS - Central bankers' speeches When you compare Canada's recent productivity record with that of other countries, what really sticks out is how much we lag on investment in machinery, equipment and, importantly, intellectual property. The global economy continues to change rapidly, and in many sectors, it's not machinery and equipment that are key-it's investment in intellectual property. Increasingly, companies need to own or have the rights to patents that will allow them to compete by adopting productivity-boosting processes. Weak investment has been a problem in Canada for a long time. You can go back 50 years and find a persistent gap between the level of capital spending per worker by Canadian firms and the level spent by their US counterparts. However, the situation has become worse over roughly the past decade. While US spending continues to increase, Canadian investment levels are lower than they were a decade ago. Economists and policy-makers across the country have worked hard to understand the root causes of why Canadian businesses seem reluctant to invest. At the Bank, we are constantly talking to companies, asking them about their challenges and opportunities. Our Business Outlook Survey consistently shows that companies say they plan to increase their spending on machinery and equipment. But we haven't seen it in the data, at least not yet. Adding to the puzzle is the fact that Canada has many advantages that should lead to higher investment and productivity. We have a well-educated labour force. We have a strong research culture at our universities that is driving advances in technology. And we have trade agreements that give us better access to global markets than any country in the world. To understand the lack of investment, it might be helpful to look at the incentives that companies see. If firms have high profits, high margins and limited competition, they may not feel as much pressure to invest. Statistics Canada published a report last month that draws a link between decreasing competition within Canada and declining investment levels.2 Another challenge for companies may be a lack of policy certainty. In some cases, incentives or regulatory approaches can change from year to year. We have also heard from companies that are naturally wary of a regulatory approval process that can be both lengthy and unpredictable. And, of course, the past few years have been a challenging time for making investment decisions. The pandemic caused tremendous levels of instability and uncertainty. A backdrop of global trade tensions is certainly not helping matters. More recently, we've heard from firms that say the current interest rate environment is making financing more difficult. However, investment levels were also weak in the years before the pandemic, when rates were much lower than today. More generally, in times of upheaval it's natural for companies, especially established ones, to want to be cautious and build reserves. I understand that. We see the risks out there. Yet these same forces and risks are also present in other countries. And companies in those countries-our global competitors-continue to invest, widening the gap with Canada, making it increasingly urgent that we turn the situation around. 5/6 BIS - Central bankers' speeches The Bank of Canada has a role here. It's our job to deliver the economic stability that should encourage investment. You can be sure we will continue to do all we can to keep inflation low, stable and predictable, supporting the investment climate along the way. This is our contribution to helping bring about an economy that's not only more productive but also more resilient. Conclusion It's time for me to wrap up. I hope I've been clear about the pressing need for Canada to increase productivity. I'm saying that it's an emergency-it's time to break the glass. I've used some pretty grim statistics to support my point. But the urgency comes not only from the fate that awaits us if we don't act. It also comes from the payoff if we do. So let me conclude on a more uplifting note. Higher productivity should be everyone's goal because it's how we build a better economy for everyone. When a business gives workers better tools and better training, those workers can produce more. That, in turn, means more revenue for the business, which allows it to absorb rising costs, including higher wages, without having to raise prices. For our part, central bankers look at the economy as a whole, not at individual companies. And when the entire economy becomes more productive, that means the country can have more growth before we see upward pressure on inflation. We can have more jobs. We can have higher wages. We've all just been through a wrenching period in the global economy. We've been reminded how corrosive inflation is and how difficult but necessary the remedy can be. Increasing productivity is a way to protect our economy from future bouts of inflation without having to rely so much on the cure of higher interest rates. At the Bank of Canada, we will keep working to provide the stability that's most conducive to risk taking and investment. With governments providing the right policy background, and with the business community doing its part to invest, together we will all be able to help Canada's economy to grow-and Canadians to prosper-in the years ahead, no matter what surprises may come. Thank you. I would like to thank Eric Santor for his help in preparing this speech. 1 See C. Haun and T. Sargent, "Decomposing Canada's Post-2000 Productivity Performance and Pandemic-Era Productivity Slowdown," Centre for the Study of Living Standards, International Productivity Monitor 45 (2023): 5–27. 2 See W. Gu, "Investment Slowdown in Canada after the Mid-2000s: The Role of Competition and Intangibles," Statistics Canada Analytical Studies Branch Research Paper No. 474 (February 2024). 6/6 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 10 April 2024.
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Tiff Macklem: Monetary Policy Decision Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 10 April 2024. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's policy announcement and our Monetary Policy Report. Today, we maintained our policy interest rate at 5%. We are also continuing our policy of quantitative tightening. We have three main messages this morning. First, monetary policy is working. Total consumer price index (CPI) and core inflation have eased further in recent months, and we expect inflation to continue to move closer to the 2% target this year. Second, growth in the economy looks to be picking up. We expect GDP growth to be solid this year and to strengthen further in 2025. Third, as we consider how much longer to hold the policy rate at the current level, we're looking for evidence that the recent further easing in underlying inflation will be sustained. Before taking your questions, let me take a moment to discuss how the economy is evolving. We have revised up our outlook for global growth. US economic growth again exceeded expectations, and while growth is expected to slow later this year, economic activity is stronger than previously forecast. In Canada, growth stalled in the second half of last year and the economy moved into excess supply. The labour market also cooled from very overheated levels. With employment growing more slowly than the working-age population, the unemployment rate has risen gradually over the last year to 6.1% in March. There are also some signs that wage pressures are beginning to ease. Economic growth is forecast to strengthen in 2024. Strong population growth is increasing consumer demand as well as the supply of workers, and spending by households is forecast to recover through the year. Spending by governments also contributes to growth, and US strength supports Canadian exports. Overall, we forecast GDP growth in Canada of 1.5% this year and about 2% in 2025 and 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026. CPI inflation eased to 2.8% in February, and price increases are now slowing across most major categories. Inflation rates for durable goods, clothing, food, and services 1/2 BIS - Central bankers' speeches such as recreation and travel have all declined. However, shelter cost inflation is still very high and remains the biggest contribution to overall inflation. Some other services, like restaurant meals, also remain persistently high. Looking ahead, we expect core inflation to continue to ease gradually. The more timely three-month rates of core inflation fell below 3% in February, suggesting some downward momentum. But with gasoline prices rising, CPI inflation is likely to remain around 3% in the coming months. It is then expected to ease below 2½% in the second half of this year and reach the 2% target in 2025. As always, there are risks around our forecast. Inflation could be higher if global tensions escalate and this boosts energy prices and further disrupts international shipping. House prices in Canada could rise faster than expected. And wage growth could remain high relative to productivity. On the down side, economic activity globally and in Canada could be weaker than expected, cooling demand and inflation too much. We don't want to leave monetary policy this restrictive longer than we need to. But if we lower our policy interest rate too early or cut too fast, we could jeopardize the progress we've made bringing inflation down. Based on our forecast and the risks, Governing Council decided it was appropriate to maintain the policy rate at 5%. We also concluded that, overall, the data since January have increased our confidence that inflation will continue to come down gradually even as economic activity strengthens. Our key indicators of inflation have all moved in the right direction and recent data point to a pickup in economic growth. I realize that what most Canadians want to know is when we will lower our policy interest rate. What do we need to see to be convinced it's time to cut? The short answer is we are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained. The further decline we've seen in core inflation is very recent. We need to be assured this is not just a temporary dip. In the months ahead, we will be closely watching the evolution of core inflation. We remain focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour as indicators of where inflation is headed. To conclude, we've come a long way in the fight against inflation, and recent progress is encouraging. We want to see this progress sustained. With that summary, the Senior Deputy Governor and I would be pleased to take your questions. 2/2 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the Standing Senate Committee on Banking, Commerce and the Economy, Ottawa, Ontario, 1 May 2024.
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Tiff Macklem: Opening statement before the Standing Senate Committee on Banking, Commerce and the Economy Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the Standing Senate Committee on Banking, Commerce and the Economy, Ottawa, Ontario, 1 May 2024. *** Good afternoon. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcement and the Bank of Canada's Monetary Policy Report. In April, we maintained our policy interest rate at 5% and published a revised outlook for the Canadian economy. We had three key messages. First, monetary policy is working. Total consumer price index (CPI) and core inflation have eased further in recent months, and we expect inflation to continue to move closer to the 2% target this year. Second, growth in the economy looks to be picking up. We expect GDP growth to be solid this year and to strengthen further in 2025. Third, as we consider how much longer to hold the policy rate at the current level, we're looking for evidence that the recent further easing in underlying inflation will be sustained. Before taking your questions, let me take a moment to discuss recent economic data and the outlook for growth and inflation. In Canada, growth stalled in the second half of last year and the economy moved into excess supply. The labour market also cooled from very overheated levels. With employment growing more slowly than the working-age population, the unemployment rate has risen gradually over the last year to 6.1% in March. There are also some signs that wage pressures are beginning to ease. Economic growth is forecast to strengthen in 2024. Strong population growth is increasing consumer demand as well as the supply of workers, and spending by households is forecast to recover through the year. Spending by governments also contributes to growth, and US strength supports Canadian exports. Overall, we forecast GDP growth in Canada of 1.5% this year and about 2% in 2025 and 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026. CPI inflation was 2.9% in March, and price increases are now slowing across most major categories. However, shelter cost inflation is still very high and remains the biggest contribution to overall inflation. 1/2 BIS - Central bankers' speeches Looking ahead, we expect core inflation to continue to ease gradually. The more timely three-month rates of core inflation are well below the 12-month rates, suggesting some downward momentum. But with gasoline prices rising, CPI inflation is likely to remain around 3% in the coming months. It is then expected to ease below 2½% in the second half of this year and reach the 2% target in 2025. As always, there are risks around our forecast. Inflation could be higher if global tensions escalate and this boosts energy prices and further disrupts international shipping. House prices in Canada could rise faster than expected. And wage growth could remain high relative to productivity. On the downside, economic activity globally and in Canada could be weaker than expected, cooling demand and inflation too much. We don't want to leave monetary policy this restrictive longer than we need to. But if we lower our policy interest rate too early or cut too fast, we could jeopardize the progress we've made bringing inflation down. Overall, the data since January have increased our confidence that inflation will continue to come down gradually even as economic activity strengthens. Our key indicators of inflation have all moved in the right direction and recent data point to a pickup in economic growth. I realize that what most Canadians want to know is when we will lower our policy interest rate. What do we need to see to be convinced it's time to cut? The short answer is we are getting closer. We are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained. In the months ahead, we will be closely watching the evolution of core inflation. We remain focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour as indicators of where inflation is headed. To conclude, we've come a long way in the fight against inflation, and recent progress is encouraging. We want to see this progress sustained. With that summary, the Senior Deputy Governor and I would be pleased to take your questions. 2/2 BIS - Central bankers' speeches
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Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 2 May 2024.
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Tiff Macklem: Opening statement before the House of Commons Standing Committee on Finance Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada, before the House of Commons Standing Committee on Finance, Ottawa, Ontario, 2 May 2024. *** Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy announcement and the Bank of Canada's Monetary Policy Report. In April, we maintained our policy interest rate at 5% and published a revised outlook for the Canadian economy. We had three key messages. First, monetary policy is working. Total consumer price index (CPI) and core inflation have eased further in recent months, and we expect inflation to continue to move closer to the 2% target this year. Second, growth in the economy looks to be picking up. We expect GDP growth to be solid this year and to strengthen further in 2025. Third, as we consider how much longer to hold the policy rate at the current level, we're looking for evidence that the recent further easing in underlying inflation will be sustained. Before taking your questions, let me take a moment to discuss recent economic data and the outlook for growth and inflation. In Canada, growth stalled in the second half of last year and the economy moved into excess supply. The labour market also cooled from very overheated levels. With employment growing more slowly than the working-age population, the unemployment rate has risen gradually over the last year to 6.1% in March. There are also some signs that wage pressures are beginning to ease. Economic growth is forecast to strengthen in 2024. Strong population growth is increasing consumer demand as well as the supply of workers, and spending by households is forecast to recover through the year. Spending by governments also contributes to growth, and US strength supports Canadian exports. Overall, we forecast GDP growth in Canada of 1.5% this year and about 2% in 2025 and 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026. CPI inflation was 2.9% in March, and price increases are now slowing across most major categories. However, shelter cost inflation is still very high and remains the biggest contribution to overall inflation. 1/2 BIS - Central bankers' speeches Looking ahead, we expect core inflation to continue to ease gradually. The more timely three-month rates of core inflation are well below the 12-month rates, suggesting some downward momentum. But with gasoline prices rising, CPI inflation is likely to remain around 3% in the coming months. It is then expected to ease below 2½% in the second half of this year and reach the 2% target in 2025. As always, there are risks around our forecast. Inflation could be higher if global tensions escalate, if house prices in Canada rise faster than expected, or if wage growth stays high relative to productivity. On the downside, economic activity globally and in Canada could be weaker than expected, cooling demand and inflation too much. We don't want to leave monetary policy this restrictive longer than we need to. But if we lower our policy interest rate too early or cut too fast, we could jeopardize the progress we've made bringing inflation down. Overall, the data since January have increased our confidence that inflation will continue to come down gradually even as economic activity strengthens. Our key indicators of inflation have all moved in the right direction and recent data point to a pickup in economic growth. I realize that what most Canadians want to know is when we will lower our policy interest rate. The short answer is we are getting closer. We are seeing what we need to see. We just need to see it for longer to be confident that progress toward price stability will be sustained. In the months ahead, we will be closely watching the evolution of core inflation. We remain focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour as indicators of where inflation is headed. To conclude, we've come a long way in the fight against inflation, and recent progress is encouraging. We want to see this progress sustained. With that summary, the Senior Deputy Governor and I would be pleased to take your questions. 2/2 BIS - Central bankers' speeches
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