Stephen S Poloz: Summary of the latest 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, 22 January
2014.
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Good morning. Tiff and I are pleased to be here with you today to discuss the January
Monetary Policy Report, which the Bank published this morning. Before we take your
questions, allow me to note the highlights of the Report.
• Inflation in Canada has moved further below the 2 per cent target. This is due
largely to significant excess supply in the economy and heightened competition in
the retail sector. The path for inflation is now expected to be lower than previously
anticipated for most of the projection period.
• The Bank expects inflation to return to the 2 per cent target in two years or so, as
the effects of retail competition dissipate and excess capacity is absorbed.
• The global economy is expected to strengthen over the next two years, rising from
2.9 per cent growth in 2013 to 3.4 per cent in 2014 and 3.7 per cent in 2015.
• The United States will lead the way, helped by diminishing fiscal drag,
accommodative monetary policy and stronger household balance sheets. The
improving U.S. outlook is affecting global bond, equity, and currency markets.
• Growth in other regions is evolving largely as projected in October.
• Global trade growth plunged after 2011, but is poised to recover as global demand
strengthens.
• In Canada, economic growth improved in the second half of 2013. However, there
have been few signs of the anticipated rebalancing towards exports and business
investment.
• While we are doing more work to understand the wedge between the level of
Canadian exports and that of foreign demand, this remains difficult to explain. We
are therefore taking a conservative approach to our forecasts for exports, and
assuming the wedge will remain.
• That said, the U.S. recovery is becoming more broad-based, including higher
investment spending by companies, and that, as well as the recent depreciation of
the Canadian dollar, should help to boost exports. This, in turn, should lead to
stronger business confidence and investment here in Canada.
Meanwhile, recent data have been consistent with the Bank's expectation of a soft
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landing in the housing market and a stabilization of household indebtedness relative
to income.
• Real GDP growth is projected to pick up from 1.8 per cent in 2013 to 2.5 per cent in
both 2014 and 2015. This implies that the economy will return gradually to capacity
over the next two years or so.
• Our recent analysis has given us an improved, yet still incomplete, understanding of
the inflation picture. We now believe the effect of heightened retail competition will
subtract about 0.3 percentage points from core inflation in 2014. This effect will be
more persistent than initially thought.
• This finding, though, does not explain all of the weakness in inflation. And so, we are
exploring whether the output gap has a greater impact on inflation than previously
believed, especially when the gap is persistent. This interpretation seems to be
relevant for other countries, as well as Canada.
While increased competition will have a permanent effect on the level of prices, it
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will have a transitory effect on the rate of inflation. As such, we believe policy should
look through it.
• Although the fundamental drivers of growth and future inflation appear to be
strengthening, inflation is expected to remain well below target for some time, and
therefore the downside risks to inflation have grown in importance. At the same
time, risks associated with elevated household imbalances have not materially
changed.
• Weighing these considerations, the Bank judges that the balance of risks remains
within the zone articulated in October, and therefore has decided to maintain the
target for the overnight rate at 1 per cent. The timing and direction of the next
change to the policy rate will depend on how new information influences this
balance of risks.
With that, Tiff and I would be pleased to take your questions.