risk that the neutral rate is so low in some economies that the effective lower bound is preventing central banks from providing sufficient monetary stimulus. they argue that the structural factors that are responsible for the low neutral rate could persist well into the future, contributing to “ secular stagnation. ” in canada, with the target for the overnight interest rate currently set at 0. 5 per cent, we judge monetary policy to be quite stimulative, although less so than it would have been a decade ago when the neutral rate was higher. at the same time, as population aging continues, the neutral rate could fall further, unless productivity growth picks up or global savings fall. and the longer weak investment persists, the more important this risk becomes. the link between slow growth and financial stability while we typically link financial stability risks to unsustainably high growth, slower growth and lower returns can also add to vulnerabilities in the financial system through a number of channels. let me talk about three. the first is a macroeconomic channel that works through households. years of low interest rates have, by design, encouraged growth in household credit, leaving many highly indebted. in canada, average household debt is around 165 per cent of disposable income. as average household income growth slows, we can expect that economic shocks — such as foreign demand shocks that reduce demand for exports or changes in commodity prices that adversely affect a country ’ s terms of trade — will result in more frequent and longer periods of shrinking incomes. this is due to two related factors. the first is just simple arithmetic : the lower the average growth rate of household income, the more likely it is adverse shocks will push it negative. the second factor is a bit more subtle. a lower neutral rate also makes it more likely that interest rates will be constrained by the effective lower bound, meaning monetary policy will have less scope to support income growth during periods of economic weakness. to get a better sense of the practical importance of these factors, we ran simulations with the bank of canada ’ s main policy model. 12 they show that, for canada, the lower neutral rate means that the probability of being at the effective lower bound — which we assume to be – 0. 5 per cent — has gone up from around 1 1 / 2 per cent to around 7 per cent. 13 our simulations also confirm that there would be more episodes when the income of workingage individuals actually declined. and the median duration of those episodes would

by more than the bank had expected, with more muted price pressures across a wide range of goods and services, consistent with the unexpected increase in excess capacity. bis central bankers ’ speeches • total cpi inflation has also been lower than anticipated, reflecting developments in core inflation and weaker - than - projected gasoline prices. • total cpi inflation is expected to remain around 1 per cent in the near term. it is expected to rise gradually, along with core inflation, to the 2 per cent target in the second half of 2014 as the economy returns to full capacity and inflation expectations remain well - anchored. • despite the reduction in global tail risks as a result of a series of actions by european and american authorities, the inflation outlook in canada is still subject to significant risks. • the three main upside risks to inflation in canada relate to the possibility of stronger - than - expected growth in the u. s. economy, higher canadian exports and renewed momentum in canadian residential investment. • the three main downside risks to inflation in canada relate to the european crisis, more protracted weakness in business investment and exports in canada, and the possibility that growth in canadian household spending could be weaker. • overall, the bank judges that the risks to the inflation outlook in canada are roughly balanced over the projection period. • reflecting all of these factors, the bank today maintained the target for the overnight rate at 1 per cent. • while some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated. with that, tiff and i would be pleased to take your questions. bis central bankers ’ speeches