Mark Carney: Opening Statement for Appearance before the Standing
Senate Committee on Banking, Trade and Commerce
Opening Statement by Mr Mark Carney, Governor of the Bank of Canada, to the Standing
Senate Committee on Banking, Trade and Commerce, Ottawa, Ontario, 22 June 2011.
* * *
Good afternoon, Mr. Chairman and committee members. Tiff and I are pleased to appear
today to discuss the Bank of Canada's analyses of the economic outlook and the stability of
the financial system. We look forward to your questions and the discussion that follows.
The Bank's most recent comprehensive assessment of the economy was presented in its
April Monetary Policy Report (MPR). On 31 May, the Bank issued its latest policy rate
announcement. These provide the basis for my comments today. Please bear in mind that
the Bank's next full economic analysis will be published in the upcoming MPR, which will be
released on 20 July 2011.
I will also take a few moments this afternoon to outline the highlights of the Bank's Financial
System Review (FSR), which was released just this morning. The FSR reviews
developments in the financial system and identifies potential vulnerabilities.
Beginning with the economic outlook:

The global recovery is proceeding broadly as we had expected in April.

The U.S. economy continues to grow at a modest pace, limited by the consolidation
of household balance sheets.

Growth in Europe is maintaining momentum, although the risks related to peripheral
economies have clearly increased. The disasters that struck Japan in March are
severely affecting its economic activity and are also causing temporary supply chain
disruptions in advanced economies, including Canada.

Although commodity prices have declined recently, they are expected to remain at
elevated levels, supported by tight global supply and very strong demand from
emerging markets.

These high prices, combined with persistent excess demand conditions in major
emerging-market economies, are contributing to broader global inflationary
pressures.

Despite the challenges that weigh on the global outlook, financial conditions remain
very stimulative.

In the short term, economic growth in Canada is expected to slow to modest rates,
due to a number of temporary factors. These include the supply chain disruptions
that will dampen automotive production, as well as the drag from adjusting to higher
energy prices on consumer spending in Canada and the United States.

Overall, a broad rebalancing of demand in Canada is underway as the economic
expansion progresses. Business investment is now growing strongly, and
contributions to growth from both household consumption and government spending
are diminishing. As I will discuss in a moment, in this context, the Bank anticipates a
slowing in both the rate of household credit growth and the upward trajectory of
household debt-to-income ratios.

The recovery in net exports is expected to be modest given the relative weakness in
the U.S. economy, Canada's underrepresentation in fast-growing emerging markets,
 While underlying inflation is relatively subdued, the Bank expects that high energy
prices and changes in provincial indirect taxes will keep total CPI inflation above
3 per cent in the short term.

Total CPI inflation is expected to converge with core inflation at 2 per cent by the
middle of 2012, as excess supply in the economy is gradually absorbed, labour
compensation growth stays modest, productivity recovers and inflation expectations
remain well-anchored.
 The Bank expects a re-acceleration of growth in the second half of the year,
consistent with a renewed narrowing of the output gap. We will update the projection
in the July MPR.
Allow me to turn now to the Bank's monitoring of developments in the financial system.

Although the Canadian financial system is currently on a sound footing, the Bank
judges that, largely because of external factors, risks to its stability remain elevated
and have edged higher since December. Of the five risks identified in the FSR, I
would like to concentrate on three:
- First, sovereign balance sheets remain strained in many advanced
economies. Fiscal strains in the euro-area periphery have continued to build
despite continued efforts by the affected countries and assistance from the
International Monetary Fund and the European Commission. Whether or not a
sovereign credit event occurs, these strains could trigger a sharp repricing of
credit risk for other governments with high debt burdens, as well as a more
generalized retrenchment from risk-taking in global markets, including markets
in Canada.
- Second, a long period of low interest rates globally may fuel excessive
risktaking. The search for yield could cause risk to be underpriced or lead
investors to take on exposures that they may not be able to manage if
conditions become less benign. Our institutions should not be lulled into a
false sense of security by current low rates.
- Lastly, the high level of household indebtedness has increased financial
vulnerabilities in Canada. Canadians are now as indebted (relative to their
income) as the Americans and the British. The Bank estimates that the
proportion of Canadian households that would be highly vulnerable to an
adverse economic shock has risen to its highest level in nine years, despite
improving economic conditions and the ongoing low level of interest rates.
This partly reflects the fact that the increase in aggregate household debt over
the past decade has been driven by households with the highest debt levels.
- There are some offsets. Debt is largely fixed rate and household net worth is
at an all-time high. However, borrowers should remember that a fixed-rate
mortgage will reprice a number of times over the life of the mortgage and,
while asset prices can rise and fall, debt endures.

The elevated levels of household debt require continued vigilance. Since 2008, the
federal government has taken a series of prudent and timely measures to tighten
mortgage insurance requirements. These will reduce the possibility that prices are
further driven up simply through higher leverage and, more broadly, support the
long-term stability of the Canadian housing market.

While these measures will help moderate the pace of debt accumulation by
households, it will take some time for their full effect to be felt. Canadian authorities
 Despite the challenging international environment and increasing strains on
household balance sheets, the Canadian financial system remains healthy. For
example, asset quality at Canada's major banks has improved further in recent
months. Moreover, the aggregate financial position of the domestic non-financial
corporate sector is solid, with corporate leverage remaining at low levels.
 Finally, I would like to note that on Monday, the Bank, along with the Minister of
Finance and the Commissioner of the RCMP, unveiled a new generation of bank
notes.

These new notes are at the frontier of bank note technology. They are secure,
durable and green. They will set a benchmark worldwide and will help maintain the
confidence Canadians already have in their currency.
With that, Tiff and I would be pleased to take your questions.