our business outlook survey interviews indicate that while companies plan to invest in new machinery and equipment, few are planning to expand their capacity, at least so far. this helps explain why business investment might be delayed relative to what would be expected in a normal cycle. this research has important implications for canada ’ s employment picture. we know that when companies restructure or close their doors, the associated job losses are usually permanent. if companies can meet increased export demand with existing capacity, the associated employment gains can be fairly modest, with most of the increase in output coming in the form of higher productivity. the bigger employment gains will come when we enter the rebuilding phase of the cycle – when companies are sufficiently confident about future export demand that they begin to invest in new capacity and create new jobs. these considerations enter into our estimation of the output gap – the difference between gdp and potential gdp – which is the key macroeconomic determinant of the outlook for bis central bankers ’ speeches underlying inflation. when the economy moves into a position of excess supply, inflation declines, and when it moves into a position of excess demand, inflation rises. there is no single preferred measure of capacity in the economy. traditionally, we have put the most weight on measures based on output, or gdp. each october, we do a full analysis of the determinants of potential output, and its future trend. we have done so in this mpr, but in future we will update this analysis in every mpr. this time, we also offer a special technical box that considers the dynamics of excess capacity in longer business cycles like this one. the reason this is important is that in such longer business cycles, the restructuring or closure of firms reduces potential output while creating permanent job losses. this means that the output gap can appear smaller than the labour market gap, which is our current situation. this difference persists until after the rebuilding phase of the recovery i discussed earlier, when the excess capacity measures eventually converge. our judgment is that we have considerable excess capacity and that continued monetary stimulus is needed to close the gap and bring inflation sustainably to target. but we take account of our uncertainty around the degree of slack by considering a range of possible slack estimates in our deliberations. another important building block of our policy framework is the neutral rate of interest. the neutral rate is the rate of interest that should emerge once all the dust has settled – inflation is on target, the economy is operating at its full capacity, and all shocks

well following the uk referendum on leaving the european union and the us election. this issue continues to draw attention at the international level. in this fsr, we bring some new analysis to the table, which draws upon an in - depth market survey conducted by the canadian fixed - income forum, an industry group established by the bank. governing council acknowledges that there are pockets where liquidity problems are more evident, such as corporate bonds, off - the - run government bonds and certain repo markets. but we also recognize that markets have yet to fully adapt to the new regulatory requirements. further, the pre - crisis period may not be the best standard for comparison, because liquidity was excessive and virtually costless at that time. it is reasonable to expect that liquidity will be marginally more costly — and market - making less lucrative — under the new regulatory regime, and that market participants will continue to adapt against the backdrop of a more resilient financial system. we will continue to monitor market behaviour and to engage with market participants, while pursuing work on the impact of regulatory reforms at the international level. with that, ms. wilkins and i will be happy to respond to your questions. 2 / 2 bis central bankers'speeches