Stephen S Poloz: Opening statement before the House of Commons
Standing Committee on Finance
Opening statement by Mr Stephen S Poloz, Governor of the Bank of Canada, before the
House of Commons Standing Committee on Finance, Ottawa, Ontario, 28 April 2015.
* * *
Good morning, Mr. Chairman and committee members. Carolyn and I are happy to be here
for one of our twice-yearly meetings on our Monetary Policy Report (MPR). Today we will
outline for you the Bank's latest economic outlook, published in our MPR on 15 April.
In this volatile and uncertain environment, it is helpful to maintain a historical perspective.
When we appeared before this committee a year ago, the price of Brent crude oil was at
$100 per barrel. It had risen steadily for a decade, from $25 in 2002 to a peak of just over
$110 in 2012.
By November, when we last met with you, oil prices had fallen to what was then their lowest
level in four years. The average price of Brent was $90 per barrel. It was clear to us that
while lower oil prices would benefit consumers, the net impact on the economy would be
negative. Lower oil prices would reduce Canada's terms of trade and domestic income and
have a material impact on investment, activity in the oil sector, and the associated
manufacturing supply chain.
All of that happened quite quickly over the next two months. By January, Brent prices had
dropped to an average of $60.
Oil prices are an important component of Canada's terms of trade and one of the key drivers
of movements in the Canadian dollar. As oil prices rose over the 2002-12 period, so did the
value of the dollar, increasing from around 63 cents to above parity.
Now, the fall in oil prices has set in motion complex dynamics, including sectoral and regional
adjustments, which will take time to work their way through the economy.
The negative effects of lower oil prices hit some sectors of the economy right away. For
example, the impact of lower prices on income and wealth has already led to a fall in
household spending. The various positives - more exports because of a stronger U.S.
economy and a lower Canadian dollar, and more consumption spending as households
spend less on fuel - will arrive only gradually, and are of uncertain size. Therefore, in
January we faced a risk that returning the Canadian economy to full capacity and stable
2 per cent inflation would be delayed significantly. Accordingly, we took out some insurance
against that risk, in the form of a 25-basis-point reduction in the policy interest rate.
Our interest rate cut occurred in the context of widespread easing in financial conditions
around the globe. No fewer than 25 central banks eased their monetary policies in the early
months of 2015. All of this monetary policy easing led to lower rates across the entire yield
curve.
What was behind this easing? Many central banks were adding stimulus in response to
persistent economic slack and below-target inflation. This easing, coupled with the positive
implications of lower energy prices for world growth, should help the global economy pick up
through the year. The Bank expects global economic growth to strengthen and average
about 3 1/2 per cent over the 2015-17 period.
Here in Canada we saw that some of the effects of lower oil prices, such as the lower
household spending I mentioned earlier, were clearly being felt in late 2014 and early 2015.
Our updated forecast in the April MPR suggests that the Canadian economy saw no growth
in the first quarter. While the impact of the oil price shock is happening faster than initially
expected, it does not appear to be larger than we anticipated in January.
Outside of the energy sector, other areas of the economy appear to be doing well. The
segments of non-energy exports that we expected to lead the recovery are doing so, and we
expect this trend to be buttressed by stronger U.S. growth and the lower Canadian dollar.
The results of our Business Outlook Survey suggest that capacity constraints are beginning
to emerge for exporters, which is promising for new investment. And, although we still have
material slack in our labour market, the market's fundamentals have begun to improve. Even
so, companies remain cautious about new investment and hiring intentions.
Weighing these various forces acting on the economy, we anticipate a partial rebound in
growth in the second quarter, and a move to above-trend growth thereafter, for annual
growth of 1.9 per cent this year. This projected growth profile gets us back on track to absorb
our excess capacity around the end of 2016, at which time inflation will settle sustainably at
2 per cent. We see the risks around this projection as roughly balanced, but they will be
reassessed continuously as new data become available.
The main risk to our outlook is the size and duration of the negative impact of the oil shock,
weighed against the positive forces that are building in the non-energy sector. Our outlook is
for the positives to begin to reassert themselves during the second quarter, and to do so
clearly in the second half of the year. The interest rate cut in January and the lower Canadian
dollar are working to speed up the transition.
Inflation, as measured by total CPI, is running at about 1 per cent, well below our 2 per cent
target. This is largely due to the drop in gasoline prices, a temporary effect. Total CPI
inflation would be quite close to zero were it not for exchange-rate effects and some
additional one-time factors. Core inflation is a little over 2 per cent, but it is also being
boosted by exchange-rate effects and other one-time factors. In our projection, total inflation
and core inflation converge on 2 per cent as these temporary factors dissipate and the
economy reaches full capacity, around the end of 2016.
Meanwhile, financial stability risks remain front-and-centre in our deliberations. These risks
are evolving in line with our expectations. The level of indebtedness, as measured by the
ratio of debt-to-disposable income, continues to edge higher. It is likely to rise further as the
decline in gross national income caused by the drop in oil prices works its way through the
system.
On the surface, lower interest rates would be expected to promote more borrowing, which
would increase this vulnerability. However, in the near term, lower borrowing rates will
actually mitigate this risk, by reducing payments for mortgage holders and giving us more
economic growth and employment gains. We believe that the best contribution the Bank can
make to lowering financial stability risks through time is to help the economy return to full
capacity and stable inflation sooner, rather than later.
With that, Carolyn and I would be happy to take your questions.