mark carney : summary of the latest monetary policy report update opening statement by mr mark carney, governor of the bank of canada, at a press conference following the release of the monetary policy report, ottawa, 21 january 2010. * * * good morning. paul and i are pleased to be here with you today to discuss the january monetary policy report, which we published this morning. • the global economic recovery is underway. economic and financial developments have been slightly more favourable than we projected in october, and the outlook for global economic growth through 2010 and 2011 is somewhat stronger. • although the recession in canada was severe, with real gdp contracting for three consecutive quarters, the magnitude of the downturn was more modest than in other major advanced economies. in particular, domestic demand held up much better in canada than elsewhere, reflecting the soundness of canada ’ s banking system, relatively healthy household and corporate balance sheets, and the speed and scale of monetary policy actions. • economic growth in canada resumed in the third quarter of 2009 and is expected to have picked up further in the fourth quarter. nevertheless, considerable excess supply remains, and the bank judges that the economy was operating about 3 ¼ per cent below its production capacity in the fourth quarter of 2009. • in canada, the recovery is expected to evolve largely as anticipated in october, with the economy returning to full capacity in the third quarter of 2011. this recovery is still expected to be more subdued than usual. the main factors supporting the canadian recovery are : monetary and fiscal policy support, increased confidence, a firming global economy, and higher terms of trade. • at the same time, the persistent strength of the canadian dollar and the low absolute level of u. s. demand continue to act as significant drags on economic activity. • for the year as a whole, the canadian economy contracted by an estimated 2. 5 per cent in 2009. it is projected to grow by 2. 9 per cent in 2010 and 3. 5 per cent in 2011. • as a result of year - over - year increases in energy prices, total cpi inflation turned positive in the fourth quarter of 2009, as had been anticipated. • in spite of the large amount of excess supply in the economy, the core rate of inflation has been slightly stronger than expected in recent months. this stickiness of core inflation is likely related to the fact that wage growth had remained high relative to the underlying trend in productivity. • the core rate of inflation is projected to increase gradually,

determined by sequential decisionmaking, subject to an understanding of the structure of the economy and of the likely responses of the other policymakers to one ’ s policy actions. in my view, the process works as follows. the administration and the congress together make decisions that determine the fiscal part of the policy mix. over the last 20 years, these decisions generally have been based on considerations that have more to do with long - run objectives such as promotion of higher longer - term growth, than with short - run stabilization. making these decisions takes considerable time because of the dynamics of the annual budget process and the legislative process. the current year ’ s decisions are incorporated and the following years ’ decisions are anticipated in the fiscal policy assumptions underlying the federal reserve ’ s forecast, extending out a year or two. the federal reserve then sets its policy to achieve the broad objectives assigned to it, specifically, price stability and full employment. fiscal decisions are, in turn, affected by budget forecasts that are partly contingent on monetary policy assumptions. in effect, fiscal policymakers make the fundamental decision about the policy mix. monetary policymakers smooth the transition to the new equilibrium, by minimizing the effect on output relative to full employment and on prices. because monetary policy adjusts continuously to changes in the economy, including those resulting from fiscal policy, it makes sense to think that fiscal policy decisions are made first and monetary policy decisions are conditional on the fiscal decisions. so does this mean that monetary policy responds directly to fiscal policy actions? i believe it is more accurate to say that the fed ’ s response is indirect. that is, monetary policy responds to changes in fiscal policy in much the same way that it responds to other influences on the economy, such as equity prices, exchange rates, or the demand for us exports due to changed growth prospects abroad. each and all of these developments affect both the macroeconomic developments and the forecast that drive adjustments in monetary policy in pursuit of full employment and price stability. it is also important not to overstate the role monetary policy plays in shaping the policy mix. indeed, the fiscal policy decision uniquely determines the policy mix. in terms of our diagram, the game is fundamentally over when the fiscal decision pins down the intersection of the is curve and the vertical line at full employment. the only question remaining is how the lm curve will come to intersect at the same point. one possibility, of course, is that the federal reserve adjusts its open market operations to move the interest rate to this