stephen s poloz : opening statement before the standing senate committee on banking, trade and commerce opening statement by mr stephen s poloz, governor of the bank of canada, before the standing senate committee on banking, trade and commerce, ottawa, ontario, 1 november 2017. * * * good afternoon, mr. chairman and committee members. senior deputy governor wilkins and i are pleased to be back before you today to discuss the bank ’ s monetary policy report ( mpr ), which we published last week. when we were last here in april, we were celebrating the fact that we had upgraded our economic forecast following a long period of disappointment. i am happy to tell you that many of the positive trends that we saw then have continued. sources of economic growth have broadened across sectors and regions, and the process of adjustment to the oil price shock is essentially complete. the bank raised its policy interest rate twice since our last visit, in july and september. we did this in the context of very strong economic growth over the first half of the year and solid progress in the labour market. over the summer, we saw evidence of firming inflation and an economy that was rapidly closing its output gap. with these two rate increases, we have taken back the cuts we made in 2015, which were crucial in helping the economy adjust to the oil shock. growth in the first half of the year averaged just over 4 per cent at an annual rate. this reflected strong consumer spending backed by rising employment and income, together with increased business investment and a jump in energy exports. we are now starting to see signs of moderation in the second half, which we forecast in july. growth in consumption and investment is expected to ease, and growth in housing is projected to slow further, in part because of the measures introduced by the ontario government in april. all told, we forecast that the economy will expand by 3. 1 per cent this year, before slowing to 2. 1 per cent in 2018. this is still faster than the growth rate of potential. we estimate that the economy is now operating close to its capacity. inflation should reach our 2 per cent target in the second half of next year, a little later than earlier projected because of the temporary impact of the stronger canadian dollar this year. we are at a crucial spot in the economic cycle, and significant uncertainties are clouding the way forward. in our mpr, we identified the four most important sources of uncertainty. i will touch on these now.

theory have a large economic impact, but they had to be avoided because of harmful side effects ( instrument instability, financial instability, balance of payments repercussions, etc. ). the changes in credit conditions that were feasible had a comparatively limited effect. third, the credit channel was thought to be the main source of impact of monetary policy on the economy. conventional monetary policy instruments ( open market operations, bank reserve management, and bank rate changes ) were said to affect credit flows by changing the liquidity positions of financial institutions. this credit channel embodied the effects of both the availability and the cost of borrowing. however, its overall influence was complex and typically slow ; and the impact of an easing of credit was considered to be especially weak – “ you can ’ t push on a string. ” 6 fourth, a need was seen for moral suasion or formal controls on lending in difficult short - run situations, such as balance of payments crises. the commission recognized the defects of such measures : arbitrary discrimination, economic distortions, and eroding effectiveness over time. however, the general view at the time was that such controls were helpful when quick effects were urgently needed. 2. the relationship between inflation and economic activity in 1958, a. w. phillips published the analysis of the relationship between wage increases and unemployment in the united kingdom that now bears his name, and researchers in the united states soon found a similar relationship. 7 by the early 1960s macroeconomists were regarding see, for example, friedman ( 1956 ). these ideas were also to be found in similar inquiries of that time in the united kingdom ( the radcliffe report ) and in the united states ( the commission on money and credit ). however, there were some differences in the argumentation of the three reports. for example, radcliffe was most interventionist while porter was the strongest advocate of market mechanisms. porter commission report, p. 434. phillips ( 1958 ), samuelson and solow ( 1960 ). the phillips curve as a description of a policy trade - off between inflation and unemployment. by accepting more inflation, it seemed possible to reach a higher level of output. a seminal study of the policy implications of the phillips curve was in a royal commission working paper by grant reuber. 8 the porter commission accepted this line of reasoning and argued that a balance had to be struck between the goals of price stability and maximizing output, and that neither should be pursued to the exclusion of the other. at the same