Stephen S Poloz: Opening statement before the Standing Senate
Committee on Banking, Trade and Commerce
Opening statement by Mr Stephen S Poloz, Governor of the Bank of Canada, to the Standing
Senate Committee on Banking, Trade and Commerce, Ottawa, Ontario, 20 April 2016.
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Good morning, Mr. Chairman and committee members. Senior Deputy Governor Wilkins and
I are happy to be back to discuss the Bank's Monetary Policy Report (MPR), which we
published last week.
It has been 18 months since Carolyn and I were last here. And it was about that time, in the
fall of 2014, when the Canadian economy first started to feel the effects of a massive shock
to our terms of trade, brought about by a sharp drop in the price of oil and other commodities.
Because Canada is such an important producer of resources, particularly oil, this shock was
a major setback. It set in motion a difficult adjustment process that has been very disruptive
for many Canadians. Investment and output in resource industries have fallen precipitously,
the decline in national income has curbed household spending and the resource sector has
seen significant job losses. These negatives have clearly outweighed the benefits of lower
energy costs for households and businesses.
From a monetary policy perspective, the shock posed a two-sided threat to our economy last
year. First, it was a clear downside risk to our ability to reach our inflation target. Second, by
cutting into national income, it worsened the vulnerability posed by household imbalances as
seen in our elevated debt-to-income ratio. To address both threats and to help facilitate the
necessary economic adjustments, we lowered our policy interest rate twice last year,
bringing it to 0.5 per cent.
While we recognized the possibility that this reduction could, at the margin, exacerbate the
vulnerability posed by household imbalances, the more important effect of lowering the policy
rate last year was to cushion the drop in income and employment caused by lower resource
prices.
Another natural consequence of the shock to our terms of trade has been a decline in the
Canadian-dollar exchange rate. It's important to note that this is not unique to Canada.
Indeed, many resource-reliant countries have seen similar depreciations in their currencies.
Both our policy moves and the lower currency have been helping to facilitate the economic
adjustments, which have been playing out over two tracks. While weakness has been
concentrated in the resource sector, the non-resource economy continues to grow at a
moderate pace. And within that, non-resource exports are clearly gathering momentum.
By the time we reached the new year, there was a clear sense of anxiety among many
financial market participants. The outlook for global growth was being downgraded again,
and commodity prices were plumbing new lows. At the Bank, we had new intelligence that
Canadian energy companies would be cutting investment even more than previously
thought. In this context, we said that we entered deliberations for our January interest rate
decision with a bias to easing policy further, but decided to wait to see details of the
government's fiscal plan.
Since January, we've seen a number of negative developments. First, projected global
economic growth has once again been taken down a notch for 2016 and 2017. This includes
the US economy, where the new profiles for investment and housing mean a mix of demand
that is less favourable for Canadian exports.
Second, investment intentions in Canada's energy sector have been downgraded even
further. True, oil prices have recovered significantly from their extreme lows. But Canadian
companies have told us that even if prices remain around current levels, there will be
significant further cuts beyond what we foresaw in January. By convention, we incorporate
the average oil price from the few weeks before we make our forecast, letting us look through
variability in markets. Because of this, our oil price assumptions are only $2 to $3 per barrel
higher than they were in January.
Third, the Canadian dollar has also increased from its lows. Our assumption in our current
projection is 76 cents US, four cents higher than in January. While there are many factors at
play, including oil prices, most of the increase appears to be due to shifts in expectations
about monetary policy in both the United States and Canada. The higher assumed level of
the dollar in our projection contributes to a lower profile for non-resource exports, as does
lower demand from the United States and elsewhere.
As the Bank's Governing Council began its deliberations for this month's interest rate
announcement, we saw that these three developments would have meant a lower projected
growth profile for the Canadian economy than we had in January. This may sound
counterintuitive, given the range of monthly economic indicators that started the year
strongly. However, some of this strength represents a catch-up after temporary weakness in
some areas during the fourth quarter, and some of it reflects temporary factors that will
unwind in the second quarter.
The other new factor we had to take into account was the federal budget. For the purposes
of our MPR and interest rate announcement, we took a close look at the Finance
Department's projections of the multiplier effect of the fiscal shock. Our analysis is that the
Department's projections are reasonable in that they are within the range of estimates you
would find in the economic literature, as well as in our own staff research. There is, of
course, greater uncertainty as to how the budget measures will affect growth in the longer
term, particularly since they will need to work their way through the household sector. In our
report, we outlined the risk that households may be more inclined to save than historical
experience would suggest.
Taking all of these changes on board, our projected growth profile is generally higher than it
was in January. We are now projecting real GDP growth of 1.7 per cent this year, 2.3 per
cent next year and 2 per cent in 2018. Our forecast suggests that the economy will likely use
up its excess capacity somewhat earlier than we predicted in January - sometime in the
second half of 2017. However, there is more than the usual degree of uncertainty around that
timing. It is always tricky to estimate an economy's potential output, and the difficulty is
compounded when the economy is going through a major structural adjustment, as Canada
is right now. We know that the collapse in investment in the commodity sector will mean a
slowdown in the economy's potential growth rate. In the near term, we've lowered our
estimate of potential output growth from 1.8 per cent to 1.5 per cent.
In terms of the Bank's primary mandate, total CPI inflation is currently below our 2 per cent
target. The upward pressure on imported prices coming from the currency depreciation is
being more than offset by the impact of lower consumer energy prices and the downward
pressure coming from excess capacity in the economy. As these factors diminish, total
inflation is projected to converge with core inflation and be sustainably on target sometime in
the second half of next year.
To sum up where we are, while recent economic data have been encouraging on balance,
they've also been quite variable. The global economy retains the capacity to disappoint
further, the complex adjustment to lower terms of trade will restrain Canada's growth over
much of our forecast horizon, and households' reactions to the government's fiscal measures
will bear close monitoring. We have not yet seen concrete evidence of higher investment and
strong firm creation. These are some of the ingredients needed for a return to natural,
selfsustaining growth with inflation sustainably on target.
With that Mr. Chairman, Carolyn and I would be happy to answer questions.