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, 24 April 2019.
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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 taking your questions, let me offer a short summary of Governing Council's deliberations.
It is important that we keep recent developments in context. The Canadian economy was
operating close to its potential for most of 2017 and 2018, and inflation is at target as a result.
Governing Council is of course preoccupied with the recent slowdown in the economy. If it were
to persist, then we would foresee inflation trending below target in the future.
Our belief is that the slowdown of growth to a below-potential pace will prove to be temporary. It
is important to understand that many disturbances affect the level of economic activity, and as
they work their way through the economy, the growth rate declines. Once adjustment to the
disturbances is complete, growth resumes.
Let me apply this idea to the current global situation. All forecasters were expecting the global
economy to slow during the latter part of 2018 and into 2019. This is because the US economy
had accelerated following fiscal actions, the effects of which would fade during 2019. However,
the world economy slowed more than expected in late 2018, and this is persisting into early
2019. Although one can point to a variety of contributing factors, one common factor is trade
conflict. This is delaying business investment decisions in many economies and slowing trade
further. Once the economy has adjusted, this heightened level of uncertainty will no longer weigh
on growth. An escalation of trade conflicts would of course pose a downside risk to the world, but
progress in resolving these conflicts would represent an upside risk.
Here in Canada, we are not immune to these global developments. But we also have some
issues of our own to deal with. Governing Council focused on four.
First, as discussed in some detail in our MPR in January, Canada's oil sector remains under
considerable stress. Since January, oil prices have firmed, including those prices received by our
western producers. But limited access to markets remains a significant source of drag and
uncertainty. This has led to another downward revision in investment intentions in the sector.
Some of this downgrade is likely more structural in nature, as it represents the continued
adjustment of the sector to global oil prices of US$50-60 per barrel, rather than the much higher
prices of five years ago. This adjustment process is also being reflected in wages and other
costs, and in housing market developments in Alberta. Importantly, as investments in the oil
patch are pared back, Canada's growth slows. But, when those investment levels stop falling,
Canada's growth will pick up, even if oil sector investment does not, as other areas of growth
come to dominate the data.
Second, uncertainty about future trade policies has risen again in Canada. We have seen
subdued business investment in most sectors for the past two years, but were hopeful that the
combination of the signing of CUSMA and the government's Accelerated Investment Incentive
would lead to a pickup in investment. While the overall effect remains to be seen, doubts about
the ratification of CUSMA remain a downside risk to our investment outlook. Related to this,
exports have started 2019 on a very weak note. Although the data are a bit puzzling, perhaps
affected by severe weather, we have taken them at face value in updating our forecast, leaving
room for further growth in future months. For both investment and exports, then, we have reason
to expect more growth in the second half of 2019.
Third, we have been monitoring developments in the housing market very closely in order to
understand how the effects of local tax changes, changes in mortgage guidelines and past rises
in interest rates would play out. In part, the analysis is complicated by the adjustment of
previously frothy markets-the greater Toronto and Vancouver areas-to a significant revision in
price expectations. Many other markets across the country-such as Halifax, Montreal, Ottawa
and Winnipeg-are seeing solid activity. This is what would be expected in an economy that is
growing, with rising population and a strong labour market. This means that as the situation
stabilizes in Toronto and Vancouver, the Canadian housing sector should return to growth overall
later this year. On top of this, mortgage rates have eased in the wake of a drop in global bond
yields. Related to this, home furnishings and renovations were two bright spots in an otherwise
dim picture for retail sales at the start of the year. It is worth noting that the retail data may also
have been affected by severe weather.
Fourth, there have been several fiscal announcements since our last Report. Initiatives taken at
the federal level and in Quebec and British Columbia will add to Canada's GDP growth. However,
the lowering of projected government spending in Ontario is sufficient to more than offset all of
these, so that fiscal policy now represents a net downward revision to our growth outlook for
2020, of about 0.2 percentage points.
Governing Council is of the view that monetary policy needs to maintain a degree of
accommodation sufficient to offset these various headwinds until the economic outlook
improves. The economy has slowed and some excess capacity has re-emerged, although this
excess capacity is not generalized across the entire economy. Indeed, the service sector
remains very strong and is creating many new jobs, and there continue to be a lot of job
vacancies. Furthermore, global and Canadian financial conditions have eased a good deal since
our January Report. For example, five-year fixed mortgage rates have declined by more than 60
basis points. All of this suggests that there is good reason to believe that the economy will pick
up in the second half of the year.
Governing Council therefore believes that this positive outlook is consistent with the current
interest rate setting. In our rate decision, we chose to remove the reference to the need for
interest rates to return into a neutral range, which we have revised to 2.25-3.25 per cent. We had
originally added this reference to neutral to remind people what policy normalization could look
like. In the current situation, we feel it is important to emphasize that we will continue to evaluate
the appropriate degree of monetary policy accommodation as new data arrive. In particular, we
are monitoring developments in household spending, oil markets, and global trade policy to
gauge the extent to which the factors weighing on growth and the inflation outlook are dissipating.
With that, Senior Deputy Governor Wilkins and I will be happy to take your questions.