the policy rate is at the effective lower bound, the benefits of forward guidance can easily outweigh the costs. at other times, the costs loom larger. indeed, in normal times, when economic and financial risks are clearly two - way, there is a very basic law of economics at work. volatility happens. it is a force of nature. economists call this underlying volatility “ shocks ” – unexplained shifts in consumer demand or business behaviour, or oil - price shocks, or shocks from foreign economies, and, yes, financial market shocks. this volatility must go somewhere in the economy. central banks target inflation, which means stabilizing inflation and economic growth, not interest rates. pursuing that mandate means that financial markets carry more of the natural volatility that arises. to make this point in its most extreme form, consider how a hypothetical, all - seeing central bank would behave. that central bank would anticipate all shocks to the economy and move interest rates up and down to offset them, so inflation would always stay right on target. looking at the data afterward, we might think that all the interest rate and financial market volatility was unnecessary, because inflation was on target the whole time. in other words, perfect policy making might look silly, simply because people cannot see the underlying shocks – but the financial market volatility would be a natural consequence of the central bank ’ s efforts to achieve its mandate. of course, we haven ’ t been in normal times for quite a while. we are just taking the first tentative steps toward normalization, and the road won ’ t always be smooth, as our recent experience in canada illustrates. late last year, we saw encouraging signs that the economic recovery was broadening. stronger exports had started to be reflected in greater business investment. however, as we approached our january decision on interest rates, we had to consider the unexpected plunge in global oil prices. given the importance of oil to our economy, this shock represented a significant downside risk to our projected inflation profile. it also posed a risk to financial stability through the reduction in income that it implied. because lower oil prices mean lower canadian income, the shock would worsen the debt - toincome ratio of canadian households, even if no new borrowing occurred. we thought in january that it would be best to act sooner rather than later, given the magnitude of the shock and the immediacy of its likely effects. indeed

stephen s poloz : central bank credibility and policy normalization remarks by mr stephen s poloz, governor of the bank of canada, to the canada - united kingdom chamber of commerce, london, united kingdom, 26 march 2015. * * * i would like to thank don coletti, stephen murchison, eric santor, scott kinnear and jing yang for their help in preparing this speech. introduction i am happy to be in the city and to have the opportunity to speak with you this afternoon. you can feel the pulse of the global financial system here, and it feels a bit like an irregular heartbeat to me. the recovery from the great recession has been a long, drawn - out affair, with some countries emerging faster than others. long - term interest rates are extremely low, well below central banks ’ inflation targets. financial market volatility has gone up across the board, as economies and policies diverge and the prospect of policy normalization becomes more real. today, i would like to consider what this all means for central bank credibility, which is something we should all care about. do very low long - term interest rates and recent increases in financial market volatility represent an erosion of central bank credibility? it probably won ’ t come as a surprise to you that i would say no. central banks are doing their jobs in a very challenging setting. in my time today, i will talk about what we can learn from low interest rates and increasing financial market volatility, as well as what we can expect as we go through the process of normalizing monetary policy. long - term interest rates and credibility let ’ s begin by looking at the extremely low borrowing costs we see in many economies. consider, for example, the return that one would receive on a 10 - year bond issued by any g - 7 government and held until it matured. investors would be accepting an annual return that would be below the central bank ’ s inflation target – in some cases, well below. what is it telling us when investors are willing to receive such low returns? central bank policy frameworks may differ, but the concept of inflation control is at the heart of monetary policy in most economies. are low yields an indication that investors think we will be unable to bring inflation back up to its target? to help answer this question, let ’ s look at the canadian data. in a recent paper, bank of canada economists bruno feunou and jean - sebastien fontaine used a term structure