it a more powerful influence on financial stability. 8 another aspect to consider is that risks to financial stability have two elements : the underlying vulnerability and the trigger that could cause a risk to materialize. both elements are part of our risk - management approach to monetary policy. over time, stimulative monetary policy may cause vulnerabilities to build up. that was part of our thinking in late 2013, when inflation was running persistently below target : we were concerned about the downside risks to inflation, but decided against easing policy further to avoid exacerbating growing household indebtedness and elevated house prices. failing to ease monetary policy in an economic downturn could, however, worsen the contraction and cause a crisis. this scenario was part of our thinking at the beginning of last year, when canada ’ s economy was hit by the collapse in oil prices and we cut our policy interest rate. although we knew that lowering the policy rate could worsen vulnerabilities related to household debt, we also knew that it would counter the risk that growth would crater and lessen the probability that the oil price shock would trigger financial stability risks. these values are based on work by gorea, kryvtsov and takamura ( forthcoming ). this issue is analyzed in more detail in alpanda and ueberfeldt ( forthcoming ). work is under way on models that capture some of these factors. see, for example, a. auclert, “ monetary policy and the redistribution channel, ” princeton university, 2015. j. stein, “ overheating in credit markets : origins, measurement, and policy responses, ” ( speech to a research symposium sponsored by the federal reserve bank of st. louis, st. louis, missouri, 7 february 2013 ). a similar conclusion flows from the analysis reviewed in j. boivin, t. lane and c. meh, “ should monetary policy be used to counteract financial imbalances? ” bank of canada review ( summer 2010 ) : 23 - 36. bis central bankers ’ speeches two tools – or three? this discussion suggests that any adaptation of monetary policy to financial stability objectives is, to say the least, far from straightforward. fortunately, monetary policy is not the only game in town. there are also macroprudential tools – regulatory measures that can be used to promote not just the safety of an individual financial institution, but also that of the entire financial system. macroprude

david dodge : economic and financial trends in the context of canada ’ s inflation - control strategy opening statement by mr david dodge, governor of the bank of canada, on the release of the monetary policy report update, 24 july 2002. * * * today, we published our update to the april monetary policy report, in which we discuss economic and financial trends in the context of canada ’ s inflation - control strategy. canada ’ s economic recovery, which began in the last quarter of 2001, gathered momentum in the first half of 2002. over the period to the end of 2003, the bank projects continued solid economic expansion at an annual rate of 3 to 4 per cent. this will result in growth of close to 3 1 / 2 per cent on an annual average basis in 2002 and in 2003. both the total and core rates of inflation are projected to be slightly above 2 per cent in the second half of 2002, before steadying out at close to 2 per cent in 2003. given that the canadian economy grew at a faster pace than anticipated in the first half of 2002, there is now less excess capacity than was projected in our april report. the economy is expected to be operating at full capacity in early 2003 - sooner than previously anticipated. in light of these developments, the bank has continued to reduce the amount of monetary stimulus in the economy, raising the target for the overnight interest rate by 25 basis points on three occasions in april, june, and july - to bring the rate to 2 3 / 4 per cent. it remains the bank ’ s view that the underlying economic situation will require further reductions in the amount of monetary stimulus. the timing and pace of policy adjustments will depend on the strength of the various factors at play and their implications for pressures on capacity, and thus on inflation. there are both upside and downside risks to the outlook for canadian economic growth. on the positive side, growth of domestic demand could turn out to be stronger than projected because of the substantial amount of monetary stimulus still in place. on the negative side, there are the uncertainties associated with global corporate and financial market developments and their potential effects on confidence and world economic growth. at this time, the risks to our projected rate of growth of 3 to 4 per cent growth appear to be balanced. as we go forward, the bank will remain focused on taking actions to achieve the 2 per cent inflation target. keeping inflation low and stable is the best contribution that monetary policy can make to sustained economic growth in canada.