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, 10
July 2019.
* * *
Good morning. Thanks for coming out on this beautiful summer day. 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). Let me start by reviewing recent developments in the Canadian
economy, before turning to key points from Governing Council's deliberations.
The Canadian economy has been recovering from the rough patch we saw at the end of 2018
and beginning of 2019. In fact, recent economic data have led us to upgrade our projection for the
second quarter. That's largely due to a surge in oil production and a bounce-back from
weatherrelated slowdowns earlier this year. We now expect that economic growth will ease over the
summer and will average around potential output growth over the second and third quarters. At
the same time, inflation remains around 2 percent.
The fact that Canada is picking up while the US economy is slowing sounds like a divergence. In
fact, it's a process of convergence. This is because the two countries are at different points in
the economic cycle. The United States is slowing to a more sustainable pace, while Canada is
moving back up to its trend growth. Activity here at home is being supported by a policy rate
that's lower than south of the border. By the second half of this year, growth should be similar in
both economies as they converge on their respective potential level of activity.
Meanwhile, at the global level, escalating trade conflicts and geopolitical tensions have been
taking even more of a toll on trade and business investment than we expected. Several major
central banks have said they are ready to provide more accommodative monetary policy or have
already taken policy actions. In this context, global interest rates have fallen considerably since
April, and the Canadian dollar has strengthened.
We have said that we are paying particular attention to Canadian household spending and the oil
sector. Consumption has rebounded and should continue to be supported by a solid labour
market. So far this year we've seen strong job growth-unemployment is still near historic lows
-and wage growth has picked up. Also, the housing market is evolving as expected at the
national level. Adjustments to previous speculative activity and changes in housing financing
conditions have been difficult in some markets. We're seeing signs that the housing market is
improving in the Greater Toronto Area, while prices and activity are still adjusting to more
sustainable levels in the Greater Vancouver Area, and Alberta's market continues to adjust to
lower oil prices. At the same time, interest rates on five-year fixed-rate mortgages have fallen
recently to around where they were five years ago, which is relevant for people buying a new
house or renewing their mortgage. It also reinforces our view that residential investment is once
again contributing to growth.
In the oil and gas sector, we expect that transportation constraints for crude oil will ease
gradually. The Trans Mountain Pipeline expansion will provide a welcome boost to capacity,
although the pipeline will come online beyond our projection horizon. There are also some
positive developments in offshore oil in Newfoundland and Labrador. Despite this, we expect
overall investment in this sector to contract further in 2019 before stabilizing over the next two
years. All told, this would bring oil and gas investment down by 20 percent since 2017, on top of
the 50 percent drop seen following the 2014 oil price shock. It's worth reminding ourselves that oil
and gas production is still contributing some $65 billion annually to the Canadian economy. In
addition, construction related to Trans Mountain and to the liquefied natural gas terminal in British
Columbia will add to business investment.
While recent export data for Canada have been encouraging, the trade environment continues to
be the biggest wild card in our outlook. Governing Council spent considerable time discussing
developments on this front. Since our April MPR, the tariffs that the United States had imposed
on aluminum and steel, as well as Canada's countermeasures, have been removed. And, there
has been some progress toward ratification of the Canada-United States-Mexico Agreement.
This is welcome news. On the other side of the ledger, the actions that China has taken against
some Canadian agricultural products and the fact that the US-China trade war is still ongoing are
clear negatives.
We have increased our estimate of the impact that trade actions and related uncertainty are
having on the economy, both globally and within our borders. For Canada, while exports are still
expected to grow over the next couple of years, we forecast them to be around 11⁄2 percent lower
than they would have been without the trade uncertainty. We have also marked down the level of
investment by 3 percent in 2021 for the same reason. Investment outside the oil and gas sector
is still expected to expand, nonetheless. Businesses across Canada tell us they plan to invest to
increase competitiveness or to meet demand for their products. Here's the bottom line: when we
take into account the impact on the global economy and commodity prices, trade conflicts and
uncertainty are projected to reduce the level of Canadian GDP by as much as 2 percent by the
end of 2021.
Staff did some excellent work to inform our discussion, and you can see the results in Box 2 of
the MPR. They analyzed two scenarios that can be thought of as extremes: an unfavourable
scenario in which trade conflicts escalate significantly, and a favourable scenario in which they
are resolved. They held fiscal and monetary policy unchanged so that the economic effects
would be more visible.
The results are clear. The impact on growth, both globally and in Canada, is much larger in the
unfavourable scenario than in the favourable one. That underscores how much we all have to
lose if the trade war escalates.
As for inflation, it actually rises in the unfavourable scenario, even as the economy weakens.
That's because a full-blown trade war would affect supply. Trade patterns and global value
chains would be severely disrupted. This would lower productivity and reduce economic
potential. It would threaten our living standards.
At the same time, slower global growth in this scenario reduces commodity prices and leads to a
sharp decline in the Canadian dollar. While a lower currency would help contain the decline in
exports, it would also put strong and persistent upward pressure on prices, as would the direct
effects of the tariffs. It's clear that monetary policy could not simultaneously buffer the impact on
growth and keep inflation in check. Central banks in advanced economies have not faced this
type of trade off since the 1970s.
Of course, during our deliberations Governing Council also discussed the Bank's ultimate
mission-inflation control. Our core inflation measures have averaged close to 2 percent in
recent quarters. Total inflation will likely dip in the upcoming months due to the dynamics of
gasoline prices and some other temporary factors. It is expected to return sustainably to target
by around mid-2020 as slack in the economy is absorbed and these temporary effects wane.
Let me wrap this up. The Canadian economy is returning to potential growth. However, the
outlook is clouded by persistent trade tensions. Taken together, the degree of accommodation
being provided by the current policy interest rate remains appropriate. As Governing Council
continues to monitor incoming data, we will pay particular attention to developments in the energy
sector and the impact of trade conflicts on the prospects for Canadian growth and inflation.
Finally, I would like to say a few words about Deputy Governor Lynn Patterson, who will retire
from the Bank of Canada next week. Her contribution over the last six years to the Bank, and to
Canada, has been exceptional, in matters as diverse as financial markets, payments, and
monetary policy. She will be a hard act to follow.
With that, Governor Poloz and I will now take your questions.