david dodge : bank of canada ’ s outlook for the canadian economy remarks by mr david dodge, governor of the bank of canada, for a meeting with canadian banks and the investment community, new york, 31 january 2002. * * * i am pleased to be here today and to have this opportunity to talk about the bank of canada's outlook for the canadian economy and to update you on our monetary policy actions. this has been a very difficult year for all of us in north america, but especially for you here in new york city. the tremendous loss of human lives as a result of the 11 september terrorist attacks has been tragic. among those who died there were family members, friends, and colleagues. and there were other innocent citizens of many nationalities caught in this tragedy, including canadians. all of us at the bank of canada share a deep sorrow and extend our heartfelt sympathy. the immediate impact and the fallout from last september's events introduced new layers of uncertainty into the economic picture, compounding the effects of a deepening global economic slowdown that had become more evident during the summer. the bank of canada quickly responded to this extreme uncertainty by aggressively lowering interest rates in order to minimize the economic impact of the attacks and limit the loss of confidence. since september, we have lowered our key policy interest rate by 200 basis points, bringing the total reduction since the beginning of 2001 to 375 basis points. this substantial monetary easing, together with measures taken by canadian governments to reduce taxes and to strengthen national security, should support growth in domestic spending. on this basis, and with the improvement we have seen since the fall in the geopolitical climate and in consumer confidence, it is now clearer that the canadian economy will gather momentum as the year unfolds. the timing and strength of the recovery will partly depend on how quickly business confidence and business investment, which remain weak in many countries, bounce back. here, it is important to note that in canada we did not have the same degree of overinvestment in fixed capital in the manufacturing sector during 1998 - 2000 as in the united states. so, the need for retrenchment and for adjustment of excess capacity in canada would be less. the bank of canada's current view is that economic growth in canada will be relatively modest in the first half of 2002 — between 1 and 2 per cent, on an annualized basis — but that it will accelerate in the second half — to a range of 3 to 4 per cent —

, there are factors that will work in the opposite direction, reducing the likelihood of zlb episodes. the most important is global financial regulatory reform, which is expected to reduce the likelihood of financial crises – a common cause of shocks large enough to necessitate near - zero interest rates. 7, 8 while a number of prominent economists have argued for a higher inflation target, there is good reason to be cautious. 9 the credibility of the 2 per cent target is invaluable. it accrued gradually over time as 2 per cent came to be perceived as a stable and achievable objective. changing the target could cause it to become regarded as temporary in nature. a lesscredible target would limit the flexibility and effectiveness of monetary policy as a stabilization tool. our research will undertake a careful analysis of the costs and benefits of adjusting the target. see e. santor and l. suchanek, “ unconventional monetary policies : evolving practices, their effects and potential costs, ” bank of canada review ( spring 2013 ) : 1 – 14. we define the neutral rate as the policy rate that will prevail after the effects of all cyclical shocks have dissipated. the estimated decline in the neutral rate mainly reflects lower potential growth rates and higher global savings. see c. wilkins, “ monetary policy and the underwhelming recovery ” ( speech to the cfa society toronto, toronto, ontario, 22 september 2014 ) ; and r. mendes, “ the neutral rate of interest in canada, ” bank of canada discussion paper no. 2014 – 5, september 2014. for example, a study conducted by the financial stability board and the basel committee on banking supervision, with the participation of bank of canada staff, found that an increase of 2 percentage points in bank capital ratios reduced the probability of a financial crisis from 4. 5 per cent to 1. 6 per cent. we also need to consider the possibility of reduced measurement bias in the cpi, given improvements made by statistics canada in the past few years. a lower bias would lead to a higher true rate of inflation for a given inflation target, thus mitigating the need for a higher target. see p. krugman, “ inflation targets reconsidered, ” ecb sintra conference, may 2014 ; and l. ball, “ a case for a long - run inflation target of four percent, ” imf working paper 14 / 92, june 2014. for an earlier appeal to central banks to at least consider