carolyn wilkins : release of the monetary policy report opening statement by ms carolyn a wilkins, senior deputy governor of the bank of canada, at the press conference following the release of the monetary policy report, ottawa, ontario, 17 january 2018. * * * good morning. governor poloz and i are pleased to be here to answer your questions about today ’ s interest rate announcement and our monetary policy report ( mpr ). the canadian economy is operating close to its potential level of activity, and inflation is close to the 2 per cent target. in this context, governing council decided to raise the policy interest rate by one quarter of a percentage point to 1. 25 per cent. the data we have received since october have been generally stronger than expected. growth around the world continues to strengthen and broaden, supporting the expansion here at home. we have upgraded the outlook for the us economy due to greater momentum and the new tax legislation passed late last year. in canada, economic growth is expected to average around 2 1 / 2 per cent in the short term, before slowing to a more sustainable pace over the projection horizon. this outlook remains clouded by uncertainty related to the future of the north american free trade agreement ( nafta ). in coming to our decision, there were three issues that governing council spent a lot of time discussing. let me walk you through them. the first issue was related to how much slack remains in the economy, and how that will evolve. obviously, this is always an important question for an inflation - targeting central bank, but it is particularly so at this point in the economic cycle. back in october, we said there were still signs of slack in the labour market. we also said that, even though we judged the economy was operating close to capacity, there was the possibility that more capacity would be created over time through business investment and an increase in labour market engagement. the data we have seen suggest that labour market slack has indeed been narrowing, and somewhat more quickly than we had been expecting. the national unemployment rate has fallen to historic lows, average hours worked are recovering and our business outlook survey points to signs of more intense labour shortages. that said, wage pressures remain modest. this could indicate that some capacity remains in the labour market. it could also indicate that wages have become less sensitive to pressure in the labour market, given the impact of global competition. either way, wages do not appear to be a source of inflation pressure at this point. we published a staff

as sequestration. with the benefit of hindsight, those moves toward balanced budgets proved to be premature. the world was in for several more years of lacklustre growth. - 4chart 2 : the canadian economy bounced back faster after the great recession real gdp, index : 2009q2 = 100, quarterly data index canada sources : bureau of economic analysis via haver analytics, statistics canada and bank of canada calculations united states last observation : 2014q4 competitiveness challenges facing canadian exports also dampened business investment in the non - energy sector. as canada ’ s economy continued to fall short of its potential, the bank of canada kept the policy rate at 1 percent. meanwhile, the us economy turned around, and in 2013 the fed hinted at tapering its purchase of financial assets. between 2014 and 2016, canada had a major setback with the collapse in the prices of oil and other commodities. we had a technical recession — two consecutive quarters of negative growth — in 2015. the bank of canada cushioned the blow by cutting policy rates twice, to 50 basis points. the canadian dollar depreciated by more than 20 percent against the us dollar. that facilitated the adjustment to lower commodity prices. in addition, the federal government introduced measures, including the child tax benefit, that added fiscal stimulus to the economy. in contrast, as us growth continued, the fed began to slowly normalize policy rates. reflecting the more favourable us economic situation, the us dollar appreciated. during this period, inflation ran below target in both countries. during 2017 – 18, economies worldwide expanded largely in sync. a major fiscal boost in the united states pushed that economy above potential. canada ’ s economy reached close to potential, and our core inflation measures reached target and stayed there. this expansion allowed both the bank of canada and the fed to raise rates toward what is viewed as a neutral range. still, canada remained slightly behind on the rate normalization, given the earlier setbacks to the economy. - 5at this point, it is useful to note another major difference between the two economies. the us housing bubble had burst in 2007 – 08, but canada ’ s housing market and mortgage debt continued to build in the decade after the global financial crisis. canadians borrowed heavily, and average house prices rose to levels that were high by any metric. this was at least partly the legacy of low interest rates, in a setting where households had room to borrow and commercial banks remained very well - capitalized. these