Carolyn Wilkins: Release of the Monetary Policy Report
Opening statement by Ms Carolyn A Wilkins, Senior Deputy Governor of the Bank of Canada, at
the press conference following the release of the Monetary Policy Report, Ottawa, Ontario, 17
January 2018.
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Good morning. Governor Poloz and I are pleased to be here to answer your questions about
today's interest rate announcement and our Monetary Policy Report (MPR).
The Canadian economy is operating close to its potential level of activity, and inflation is close to
the 2 per cent target. In this context, Governing Council decided to raise the policy interest rate by
one quarter of a percentage point to 1.25 per cent.
The data we have received since October have been generally stronger than expected. Growth
around the world continues to strengthen and broaden, supporting the expansion here at home.
We have upgraded the outlook for the US economy due to greater momentum and the new tax
legislation passed late last year.
In Canada, economic growth is expected to average around 2 1/2 per cent in the short term,
before slowing to a more sustainable pace over the projection horizon. This outlook remains
clouded by uncertainty related to the future of the North American Free Trade Agreement
(NAFTA).
In coming to our decision, there were three issues that Governing Council spent a lot of time
discussing. Let me walk you through them.
The first issue was related to how much slack remains in the economy, and how that will evolve.
Obviously, this is always an important question for an inflation-targeting central bank, but it is
particularly so at this point in the economic cycle. Back in October, we said there were still signs
of slack in the labour market. We also said that, even though we judged the economy was
operating close to capacity, there was the possibility that more capacity would be created over
time through business investment and an increase in labour market engagement.
The data we have seen suggest that labour market slack has indeed been narrowing, and
somewhat more quickly than we had been expecting. The national unemployment rate has fallen
to historic lows, average hours worked are recovering and our Business Outlook Survey points
to signs of more intense labour shortages. That said, wage pressures remain modest. This
could indicate that some capacity remains in the labour market. It could also indicate that wages
have become less sensitive to pressure in the labour market, given the impact of global
competition. Either way, wages do not appear to be a source of inflation pressure at this point.
We published a staff analytical note today about wages, and will continue to monitor this issue.
In terms of new capacity creation, we have also seen positive signs. Business investment has
continued to grow, our Business Outlook Survey shows that intentions remain positive, and
historical data revisions imply that capacity is greater than we previously thought. New
companies are typically a key source of capacity growth, and while it is still too early to determine
the trend, recent data on firm creation have been encouraging.
We will update our views on the economy's potential in the April MPR.
The second issue was how the evolution of capacity pressures will affect the outlook for inflation.
As the Governor noted in a speech last November, a number of economists and policy-makers
have been struggling to explain weaker-than-expected inflation in many jurisdictions. This has not
been the case here in Canada, where core inflation measures have been increasing and
behaving largely as we would have expected.
Inflation was actually a bit stronger than we projected in October, rising to just above our 2 per
cent target near the end of last year. This was due to the temporary impact of higher energy
prices. We expect a bit of a dip in inflation in the near term, largely because of the base-year
effects of gasoline prices. The big picture is that we project inflation to fluctuate relatively close to
target throughout the projection horizon.
That said, there is still the risk of a drag on inflation coming from global trends, such as
digitalization in the economy. This will continue to be something that we watch closely.
The final key issue we discussed is how best to account for the uncertainty surrounding the
renegotiation of NAFTA in our policy decisions.
Where trade policy decisions have already been taken, such as in the case of softwood lumber,
we have built in their expected effects. In addition, while the results from the Business Outlook
Survey were positive, an increasing number of firms told us that uncertainty surrounding the
outcome of the talks is weighing on their investment decisions and, to a lesser extent, trade.
Because of this, we added some more negative judgement to our profile for both business
investment and exports.
Consistent with this approach, our outlook is based on the premise that current trade
agreements will remain in place over the projection horizon. There are still a wide range of
possible outcomes, which could play out over many different timelines. We do not know how the
talks will conclude, and we do not know how governments will react to whatever outcome is
reached. This means that trying to quantify any particular scenario would not be useful at this
point for monetary policy purposes.
However, Bank staff have been working to determine the channels through which our economy
could be affected by changes to trade policy. It is a subtle exercise. Economic theory tells us that
there can be both upward and downward pressure on inflation. That is because changes to trade
policy can work through multiple channels that affect both demand and supply in the economy
over time. Such changes can also affect asset prices and the exchange rate. Whatever the
outcome, we will be ready to assess the impact as it unfolds, and adjust monetary policy in a
timely way, if required.
Taking all of these issues into account, Governing Council judges that while the economic
outlook is expected to warrant higher interest rates over time, some continued monetary policy
accommodation will likely be needed to keep the economy operating close to potential and
inflation on target.
Continued stimulus is likely to be required for a time to take into account a number of factors.
These include the effects of uncertainty related to trade negotiations, the expected effects of
recent adjustments to mortgage lending policies, and the greater sensitivity of the economy to
interest rates given high household indebtedness. In this context, raising the policy rate too
quickly would risk stalling the expansion, and cause inflation to fall back below target. At the
same time, raising the policy rate too slowly would risk a buildup of inflation pressures. Governing
Council will therefore remain cautious in considering future policy adjustments, guided by
incoming data in assessing the economy's sensitivity to interest rates, the evolution of economic
capacity, and the dynamics of both wage growth and inflation.
With that, Governor Poloz and I would now be happy to answer your questions.