stephen s poloz : opening statement before the senate standing committee on banking, trade and commerce opening statement by mr stephen s poloz, governor of the bank of canada, before the senate standing committee on banking, trade and commerce, ottawa, ontario, 20 november 2013. * * * thank you for the opportunity for tiff and me to be with you today to discuss the october monetary policy report, which the bank published recently. the bank aims to communicate our objectives openly and effectively and to stand accountable for our actions before canadians. one of the best ways to do this is through appearances such as this one. allow me to spend a few minutes on the highlights of the report. i ’ d like to flag some important changes that were introduced with this issue. • we have modified the report to explicitly capture the uncertainty that is inherent in our outlook. the goal is to present to canadians a reflection of the evolution of the risks to the inflation outlook that are embedded in our policy, rather than simply compare a snapshot of the current forecast with that of our previous forecast. • the picture is not always perfectly clear, and so we added new measures of ex ante, or before the fact, uncertainty to our five most critical projection variables. we added “ rule of thumb ” ranges around the base - case projection for the growth of canadian and u. s. gdp and for canadian total cpi inflation, as well as for the current level of the output gap and the growth rate of potential output in canada. • with this, we are reminding ourselves – and those who watch us – that economic projections are subject to considerable uncertainty and are revised over time as new economic data become available. • monetary policy formulation is more a process of risk management than one of engineering. in our policy deliberations, we evaluate and assess all of the risks, both positive and negative, and use judgment to determine the balance among them. • as is customary in the october report, we reviewed the forecast for potential output. due to lower - than - expected labour productivity growth in the past year, as well as the delay in the expected pickup in demand for exports and investment, the forecast for potential output growth was revised down slightly. • since the report was published four weeks ago, the outlook for the global and canadian economies has not changed substantially. • let me remind you what we reported : – we expect the global economy to expand modestly in 2013. however, its near - term dynamic has changed, and the composition

policy can make to the economic and financial welfare of canada. inflation, disinflation, and deflation inflation is, of course, defined as a persistent increase in the average price of goods and services ; in other words, a rising trend in the cost of living. in the broadest terms, this is measured by the total, or headline, consumer price index ( cpi ), which tracks the retail prices of a representative " shopping basket " of goods and services over time. it is also the rate that the bank of canada targets for its monetary policy. disinflation occurs when there is a decline in the rate of increase in prices, while deflation refers to a sustained fall in prices ; where the annual change in the cpi actually turns negative year after year. those of you " distinguished " enough to remember the inflation of the 1970s and 1980s may wonder why anyone – particularly a central banker – might be concerned with too low a level of inflation or even a fall in the general price level. the answer is that we are not concerned if these periods are transitory. in fact, as i will discuss in a moment, the bank expects total cpi inflation to be below zero in the second and third quarters of this year before returning to the two per cent target by 2011. while such transitory movements in prices are generally harmless over the long term, greater risks arise from a sustained fall in prices. such deflation, if left unchecked, can weigh on economic activity in two main ways. first, it increases the real burden of debt, making it more difficult for indebted households to consume and leveraged firms to invest. second, if deflationary expectations take hold, purchases and investments may be postponed in the expectation that they can be executed at a lower price at a later date. after all, if prices are falling, why buy that new car or refrigerator – or invest in technology or equipment – when they could be cheaper in six or nine month's time? a mild deflation took hold in japan in the 1990s and was associated with a lost decade of missed economic opportunity. today in the united states, the economy is in the midst of a serious recession and, with the recent dip in u. s. total cpi inflation to below zero, concerns about the possibility of deflation there have increased. recognizing the risks, the federal reserve is responding proactively and presciently – cutting interest rates effectively to zero and committing to using " all available