Stephen S Poloz: Release of the 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, 30 October
2019.
* * *
Good morning. Senior Deputy Governor Wilkins and I are pleased to be here to answer your
questions about today's interest rate announcement and our Monetary Policy Report (MPR).
Before turning to your questions, let me first offer some insight into Governing Council's
deliberations.
Not surprisingly, the worsening global situation was the primary issue. Economic forecasts have
been marked down further in most countries, largely as a consequence of the escalation of trade
actions and uncertainty around what may be next. Heightened uncertainty about future trade
policies is directly reducing business investment, and there is a risk that this will spread to
households as well. These consequences can be buffered through easier monetary policy, and
many central banks have recently eased in response. However, we need to remember that tariffs
and trade restrictions will work over time to permanently reduce potential output everywhere,
while raising the prices of consumer goods-a stagflationary scenario. Monetary policy can only
do so much about these elements of the shock.
Canada is not immune to these global developments. In fact, Canada was one of the first
countries to feel the effects of trade policy uncertainty, since NAFTA was the first target of the
Trump administration. Indeed, this uncertainty has been weighing on investment in Canada for
the past three years. These were important headwinds preventing Canadian interest rates from
rising by as much as US rates did during 2017-18. Nevertheless, as other economies feel a
growing impact from the trade war, there are second-round impacts on Canada through weaker
exports and lower commodity prices.
In today's updated projections, we are forecasting both exports and business investment to
contract in the second half of this year and to recover only moderately in the next two years. We
can see a wide range of indicators pointing to these effects-in manufacturing, mining and rail
transportation-in our Business Outlook Survey and in the quarterly reports of bellwether global
companies. While we have had these secondary effects in our forecast for some time, and
increased them in our latest projection, these are mostly judgment-based, and the situation could
worsen. Accordingly, we present a deeper analysis of this downside risk in today's MPR, in Box
3. Let me just note that the biggest effect for Canada of a more negative global growth scenario
would be a steeper drop in commodity prices and, as in 2015, a significant depreciation of the
Canadian dollar.
In contrast to these adverse global developments, the Canadian economy is demonstrating
resilience overall. The economy continues to create new jobs at a solid pace, the unemployment
rate is near an all-time low, many companies are reporting an acute shortage of skilled workers,
and wage growth is picking up noticeably in the past six months or so. The housing sector is
clearly on the rebound, having digested the various housing policy changes put into place during
2016-18, and is still being fuelled by relatively high rates of immigration. Consumption spending
has held up relatively well on average, supported by the solid labour market and low interest
rates, even as the savings rate has been edging higher.
At the same time, energy-producing regions continue to struggle, as the full adjustment to the
decline in oil prices back in 2015 is not yet complete, and transportation constraints are making
the situation worse. You may recall that back in 2015 we said that the full adjustment would take
up to five years-that even with lower interest rates and a lower dollar, as well as fiscal stimulus,
the adjustment to such a large shock takes a long time. It is painful for individuals, as it involves
extended layoffs and possibly interprovincial migration, which is costly for all concerned.
All this adds up to a complex outlook for Canada, with considerable variation across regions and
sectors. The strong labour market points to sources of growth such as information technology
and other professional services, tourism, education, health care and financial services. Some of
this growth is being offset by negative effects coming through business investment and exports,
particularly in manufacturing and the resource sector. On the whole, however, it appears that our
economy is still operating close to capacity but probably with a modest amount of excess supply.
Governing Council agreed that, all things considered, this excess supply is probably not
pervasive. Furthermore, our situation differs from many other countries in that inflation is at our 2
percent target today and projected to remain very close to target, despite the presence of modest
excess supply. However, we acknowledge the downside risks, as set out in our alternative
scenario in Box 3.
Governing Council also devoted some time to a discussion of the evolution of financial
vulnerabilities in Canada. We have been encouraged by developments since the enhancement of
the mortgage stress test, as there has been a significant decline in new mortgages above 450
percent of disposable income. Further, we have not seen evidence of froth in major housing
markets for some time now. However, the recent strength in many housing markets across the
country is a reminder that we will be carrying high levels of debt for a long time, despite a
constructive evolution of vulnerabilities.
It is with this context in mind that Governing Council considered whether the downside risks to
the Canadian economy were sufficient at this time to warrant a more accommodative monetary
policy as a form of insurance against those risks, and we concluded that they were not. In this
setting, we discussed whether such insurance may come at a cost, in the form of higher
financial vulnerabilities and possible consequences for the economy and inflation in the future.
We agreed that the new mortgage rules in place limit this cost, but the situation will require
continuous monitoring. Moreover, the fact that inflation has been on target and is projected to
remain near target means that we can weigh the upside and downside risks to inflation more
symmetrically.
Governing Council is mindful that the resilience of Canada's economy will be increasingly tested
as trade conflicts and uncertainty persist. In considering the appropriate path for monetary policy,
we will be monitoring the extent to which the global slowdown spreads beyond manufacturing
and investment. In this context, we will pay close attention to the sources of resilience in the
Canadian economy, notably consumer spending and housing activity. We will also be watching
for any changes to fiscal policy at the federal level now that the election is behind us.
With that, Senior Deputy Governor Wilkins and I will now be happy to take your questions.