stephen s poloz : summary of the latest 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, 22 january 2014. * * * good morning. tiff and i are pleased to be here with you today to discuss the january monetary policy report, which the bank published this morning. before we take your questions, allow me to note the highlights of the report. • inflation in canada has moved further below the 2 per cent target. this is due largely to significant excess supply in the economy and heightened competition in the retail sector. the path for inflation is now expected to be lower than previously anticipated for most of the projection period. • the bank expects inflation to return to the 2 per cent target in two years or so, as the effects of retail competition dissipate and excess capacity is absorbed. • the global economy is expected to strengthen over the next two years, rising from 2. 9 per cent growth in 2013 to 3. 4 per cent in 2014 and 3. 7 per cent in 2015. • the united states will lead the way, helped by diminishing fiscal drag, accommodative monetary policy and stronger household balance sheets. the improving u. s. outlook is affecting global bond, equity, and currency markets. • growth in other regions is evolving largely as projected in october. • global trade growth plunged after 2011, but is poised to recover as global demand strengthens. • in canada, economic growth improved in the second half of 2013. however, there have been few signs of the anticipated rebalancing towards exports and business investment. • while we are doing more work to understand the wedge between the level of canadian exports and that of foreign demand, this remains difficult to explain. we are therefore taking a conservative approach to our forecasts for exports, and assuming the wedge will remain. • that said, the u. s. recovery is becoming more broad - based, including higher investment spending by companies, and that, as well as the recent depreciation of the canadian dollar, should help to boost exports. this, in turn, should lead to stronger business confidence and investment here in canada. • meanwhile, recent data have been consistent with the bank ’ s expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income. • real gdp growth is projected to pick up from 1.

test results for the 19 largest u. s. banks. these tests showed that the amounts of additional capital that need to be raised are manageable – indeed, more than half of the estimated shortfall has already been filled. the results have contributed to a general improvement of confidence in the global banking sector. to the extent that global levels of uncertainty and risk aversion have been lowered, this should also relieve some of the market pressure on canadian banks to maintain inordinately high capital ratios. it would be welcome if buffers could serve their intended purpose, particularly in light of the extraordinary liquidity and funding support that public authorities have provided to our financial institutions. policy response the crisis has undermined the credibility and demonstrated the procyclicality of the current bank capital regulatory regime. this, too, is unacceptable. an improved regime should be dynamic ( with buffers and provisions moving through the cycle ), simple ( including canadianstyle leverage caps ), and coherent ( consistent with broader initiatives such as moving overthe - counter derivatives onto exchanges ). 2 the bank is working with its domestic partners and is using its positions on the basel committee of banking supervision, at the financial stability board, and in the g - 20 to advance this goal. in april, g - 20 leaders made it a priority to find ways to reduce procyclicality in the financial system ( procyclicality in the financial sector resembles the hog cycle, except that the boombust nature is further encouraged by regulations, accounting standards, and market practices ). 3 to that end, our latest fsr provides detailed analysis of key issues, ranging from reducing the procyclicality of bank capital regimes, compensation packages, and valueat - risk - based risk - management practices. 4 the bank will continue to devote considerable analytic resources to ensure canada leads the g - 20 effort to reduce procyclicality. household and corporate balance sheets the resilience of our financial institutions is obviously directly affected by the financial resilience of canadian households and corporations. canadian firms entered this recession in very strong shape. corporate leverage is close to an historic low and is substantially below that in other major countries ( chart 7 ). the picture for canadian households is more mixed. the starting point is relatively strong : the debt - service ratio has been stable over the past year and remains just below its longterm average. in addition, equity in canadian homes is significantly higher than in the united states ( chart