David Dodge: Adjusting to change
Remarks by Mr David Dodge, Governor of the Bank of Canada, to the Winnipeg Chamber of
Commerce, Winnipeg, Manitoba, 15 June 2005.
* * *
Good afternoon. I'm glad to be back in Winnipeg. The last time I delivered a speech here was in
January 2002. A lot has changed since then - in this city and in the Canadian economy. At that time,
our economy was recovering from a worldwide economic slowdown and from the impact of the
September 2001 terrorist attacks in the United States. Today, we face more-intense international
competition, but we also face new opportunities, as expanding economies become important markets
for our products. Like the rest of Canada, Winnipeg and Manitoba are feeling the impact of these
international changes.
Change is the central theme of my remarks today. First, I will talk about some of the changes that
have taken place at the Bank of Canada over its 70-year history. Then, I'll talk about some of the
changes that are currently taking place in the global economy, as well as how we see our economy -
across Canada and right here in Manitoba - adjusting to these changes.
Changes at the Bank of Canada
This year marks the 70th anniversary of the Bank of Canada. The Bank opened its doors on 11 March
1935, at a time when the Canadian economy was reeling from the effects of a Prairie drought and a
worldwide Depression. In its early days, much of the Bank's work was focused on trying to cushion the
economy from the effects of high unemployment and falling prices, and replacing bank notes from
different issuers with Bank of Canada notes. Almost every aspect of the Bank's work has changed
since that time. But today I'll focus on the changes that have taken place in the conduct of monetary
policy.
By the late 1950s, the Bank's monetary policy and the federal government's fiscal policy were trying to
find a balance between controlling inflationary pressures in the economy and encouraging high levels
of employment. The economic boom of the 1960s and the bitter inflationary experiences of the 1970s
eventually led to an increased focus on price stability as the goal for monetary policy. We developed a
better appreciation that keeping inflation low, stable, and predictable is the best contribution a central
bank can make to the economic welfare of a nation.
During those decades, we learned some key lessons. The first is that a floating exchange rate is a
tremendous asset in helping an economy adjust to changes, particularly an economy as open as ours.
A floating currency gives a country the flexibility it needs to adjust to economic forces that originate
from inside and outside its borders.
The second lesson we learned is that, for monetary policy to be successful in controlling inflation, a
floating exchange rate is not enough. An "anchor" for monetary policy is also needed. Canada first
floated its dollar in 1950, but returned to a fixed exchange rate for eight years during the 1960s. After
the decision to float the dollar again in 1970, the Bank spent the 1970s and 1980s searching for an
appropriate monetary policy anchor. By this, I mean a clear target for monetary policy, a way to help
policy-makers keep policy on track, and a way to tie down or "anchor" expectations about future
inflation. The outcome of that search was the eventual adoption of inflation targets as the anchor for
Canadian monetary policy.
In February 1991, the Bank and the federal government announced an agreement on a series of
inflation-reduction targets. This agreement has been extended three times, and since 1995, it has
called for the Bank to keep inflation at 2 per cent, the midpoint of a 1 to 3 per cent target range. This
inflation-targeting system, supported by a floating exchange rate, has done more than keep inflation
low - it has delivered strong and sustained growth in output and employment in Canada.
Let me quickly stress that our inflation-targeting framework operates in a symmetric way - we care just
as much about inflation falling below target as we do about inflation rising above target. If demand for
goods and services pushes the Canadian economy against the limits of its capacity, and inflation is
poised to rise above the target, the Bank will raise interest rates to cool off the economy. And when
the economy is operating below its production capacity, and inflation is poised to fall below the target,
the Bank will lower interest rates to stimulate growth. This symmetric approach helps the Canadian
economy adjust to changing circumstances, while maintaining strong, sustained growth in output and
employment.
The Bank's commitment to the idea of transparency is another way in which our monetary policy has
evolved. There was a time when central bankers kept their actions and thoughts shrouded in secrecy,
convinced that their policy would be more effective if implemented with an element of surprise. Times
have changed, and best practices in monetary policy have evolved. We have found that monetary
policy is more effective when people understand what we are doing and why. That's why we
communicate regularly with parliamentarians, with markets, and with the public. We do this through
our regular Monetary Policy Reports and Updates to those reports. We do this through press releases
on fixed announcement dates for interest rate decisions, eight times a year. And we do this through
public speaking engagements with audiences across the country.
Our methods of communication also continue to change. Today, we use more tools and more
technologies to reach Canadians and explain our work. For example, the audio portion of this speech
is being broadcast live on the Internet. And we have just completed a redevelopment of the Bank's
website. Since its creation in 1995, our website has been central to our efforts to conduct the Bank's
business in an open and transparent manner. The site is visited over 180,000 times a week. In 2003, it
was named "Central Bank Website of the Year" by Central Banking Publications in the United
Kingdom. We wanted to make the site even better, and so on Monday we launched a new version. It
features an attractive graphic redesign, improved navigation, and a lot of new content. I encourage
you to visit our new site, and we welcome your comments.
Changes in the global economy
So that's a quick look at some of the ways that the Bank has changed in 70 years. I'll spend the
remainder of my time today discussing some of the major changes afoot in the global economy and
how the Canadian economy is adjusting to these developments.
I've just returned to Canada from meetings with central bankers in China and Japan. I have also
attended meetings in Switzerland, the United States, and Morocco over the past month. And in two
weeks, I will head to the United Kingdom. In these countries, and in almost every other nation, people
are being affected by the same powerful forces - growing competition from emerging-market
economies, such as China and India, and large and growing financial imbalances in the United States
and Asia. The growth of emerging-market economies has driven up demand for commodities, and that
has pushed up the world prices for oil and many other commodities that we produce in Canada.
Meanwhile, the more competitive world environment and productivity improvements in some countries
are lowering the prices for a number of consumer goods, communications services, and computer
equipment.
All of these forces are causing significant exchange rate movements, including a sharp appreciation of
the Canadian dollar against the U.S. dollar over the past couple of years. Higher prices for many
commodities produced in Canada means that our terms of trade - that is, the ratio of the prices that
Canadians receive for their exports to the prices that they pay for their imports - have improved by
about 14 per cent since late 2001. This has contributed importantly to higher real incomes and
stronger domestic demand.
How has the Canadian economy been adjusting to these various economic forces? In the Bank's last
Monetary Policy Report, published in April, we noted that we have seen increased business
investment spending in oil and gas extraction, in other mining activity, and in wood-product
manufacturing. These sectors are benefiting from higher world prices for their products. We are also
seeing rising investment in sectors that are not very exposed to international trade, such as electric
power generation, finance and insurance, and information and cultural industries. In these latter cases,
firms are reacting to strong growth in domestic demand. We've also had very strong investment in
housing.
But in other sectors that are highly exposed to international trade, prices are either falling or are rising
very slowly. Here, I am referring to goods-producing sectors, such as auto parts, furniture, and clothing
manufacturing, as well as service sectors such as tourism. Firms in these industries are feeling the
pressure of the higher Canadian dollar, and they are also facing increased competition from other
regions of the world.
The good news is that many Canadian firms are making the necessary adjustments. Investment
spending is being directed towards increased specialization, higher productivity, and lower costs.
Since much of the productivity-enhancing machinery and equipment is priced in U.S. dollars, the
stronger Canadian dollar has made it easier for firms to invest in equipment that boosts productivity.
Stiffer competition is also encouraging firms to seek new markets, increase their specialization, and
offer more value-added, customized services.
Other adjustments are also taking place. A growing number of firms are looking to cut costs by
importing more inputs. We've certainly seen this type of adjustment taking place among manufacturers
of telecommunications equipment. Other firms are phasing out the production of goods and services
with low profit margins and concentrating on those that yield higher returns.
Current economic developments in Canada and Manitoba
Through its monetary policy, the Bank is helping these adjustments by supporting domestic demand.
In our April Monetary Policy Report, we projected that domestic demand would grow by almost 4 per
cent in 2005. According to recently released data, it grew by slightly more than expected during the
first quarter of the year. So we continue to see evidence that strong domestic demand is offsetting the
smaller contribution that net exports are making to economic growth.
On 14 July, we will publish our Monetary Policy Report Update, which will contain our latest views on
the Canadian economy. The Bank is in the process of gathering and analyzing the full set of
information on the global and the Canadian economies that will feed into our next interest rate
decision, and into the Update.
On our last policy-announcement date in May, we decided to maintain the target for the overnight
interest rate at 2 1/2 per cent. At that time, we indicated that global and Canadian economic
developments had been unfolding broadly in line with our expectations and that our outlook for the
Canadian economy through to the end of 2006 was unchanged from the one we presented in our April
Monetary Policy Report. The analysis contained in that Report is still relevant. So is our statement
that, in line with this outlook for growth and inflation, a reduction of monetary stimulus - that is, an
increase in our key policy rate - will be required over time.
Now, let me say a few words about the economic prospects for Manitoba. The provincial economy
grew by an estimated 2.3 per cent last year, up from 1.5 per cent in 2003. Like the rest of Canada,
Manitoba will rely heavily on domestic spending as an engine of growth in 2005. Private sector
forecasters are expecting output growth of about 2.7 per cent this year, largely as a result of strong
consumption and investment. Exports should also continue to grow, albeit at a slower pace than in
2004. This projection assumes that agricultural production will increase in 2005. It is too early to
predict the impact of the recent floods that have ruined many fields in the province.
Diversification in Manitoba's economy has been helpful. This province's economy is one of the most
diversified in Canada - with a good mix of goods-producing and service industries, resources and
manufacturing, traditional and new technology. And there is growing diversity and innovation within
industries, such as pharmaceuticals, furniture manufacturing, and the transportation-equipment sector.
The broadening of Manitoba's economic base has provided stability to the economy and has kept the
province's unemployment rate well below the national average. Manitoba has also been helped by
continued fiscal prudence.
Conclusion
Change is rarely made without difficulty, even when we know that the change is for the better. This is
certainly true of adjustments in response to the global economic realities of today. In some cases,
industries are being forced to rethink the way they do business. Some firms will close, and some jobs
will be lost. This type of adjustment is never easy.
But economic change creates new opportunities. And in cities like Winnipeg, and all across Canada,
individuals, businesses, industries, and public sector institutions are making the adjustments that will
help them improve their competitiveness and seize new opportunities. These efforts also make the
Canadian economy stronger and more resilient. That is the best way to prepare ourselves and our
economy for whatever changes the future may bring.