, our policy tool must always be directed first at our inflation target. even in extreme conditions, when financial stability risks constrain monetary policy from achieving the inflation target over a reasonable time frame, a central bank would want to ensure that all macroprudential options were exhausted before trying to address those risks with monetary policy. let me give a real - life example to illustrate how we put our risk - management approach into practice. last year, before the oil price shock hit the canadian economy, our policy was in the zone i just described, with inflation on course to return to target in a reasonable time frame and vulnerabilities in the household sector looking as if they would evolve constructively. the oil price shock changed the outlook dramatically. it represented a potentially sizable reduction of our national income and threatened to drive inflation below target for an unacceptably long time. the expected sharp decline in economic activity and employment also represented a possible trigger for canadian financial stability risks related to elevated household debt. our monetary policy was knocked out of the zone, and the downside risk to future inflation was material. so, in january, we lowered our policy interest rate, and we did so again six months later as the impact of the shock became clearer. we knew that easing policy would have implications for financial stability. however, we also knew that those concerns had to remain subordinate to the primary mission of achieving our inflation target and getting our policy back in the zone where the risks are balanced. our riskmanagement approach implied that, in the absence of any additional macroprudential measures, our actions would affect the balance of risks in opposite directions. lowering interest rates could worsen vulnerabilities related to household debt at the margin, but it would also lessen the chances of the oil price shock triggering financial stability risks. in the current context, getting the economy back to full capacity with inflation on target is central to promoting financial stability over the longer term. conclusion it ’ s time to conclude. the dramatic events of the financial crisis required a dramatic reaction. new financial sector rules are being implemented to make the global economy safer. for financial institutions, this is a long and difficult path, but the stakes are too high to contemplate leaving the job incomplete. policy - makers are working hard to understand the impact of new regulations and to develop effective frameworks and best practices for implementing macroprudential policies. for central banks, we know that financial stability has now become a permanent preoccup

2 per cent in the period prior to the crisis. the neutral rate serves as an anchor for our models and analysis, but it is not a fixed beacon because the structural factors that influence it can change over time. relative to this longer - term concept of neutral, the policy rate in canada is stimulative. 9 we need this stimulus to close the output gap and maintain inflation sustainably at target. but even with a closed output gap and inflation at target, the policy rate may not be at neutral. as long as the factors leaning on growth persist, a policy rate below neutral would be required to maintain inflation sustainably at target. in the absence of this policy stimulus, the output gap would reemerge and inflation would fall below target. 10 some of the headwinds appear to be dissipating, but there is considerable uncertainty about how long they will persist. let ’ s not forget that advanced economies ’ debt doubled from roughly 160 per cent of gdp to 320 per cent between 1980 and 2010, and will take a long time to unwind. in fact, the global savings rate is expected to increase over the next five years. a joint analysis by the financial stability board and the basel committee on banking supervision attempts to quantify this adjustment. it suggests that a 3 - percentage - point increase in banks ’ common equity tier 1 capital ratio would raise lending spreads by around 45 to 50 basis points. estimates for canada, prepared by the bank of canada, fall very close to this range. o. blanchard, d. furceri and a. pescatori, “ a prolonged period of low real interest rates? ” chapter 8, secular stagnation : facts, causes and cures, a voxeu. org book edited by c. teulings and r. baldwin ( london, uk : cepr press, 2014 ). also see : j. cruz lopez, r. mendes and h. vikstedt, “ the market for collateral : the potential impact of financial regulation, ” bank of canada financial system review ( june 2013 ) : 45 – 52. common global developments play a central role in determining longer - run neutral rates in all countries, but country - specific differences in structural factors do introduce some heterogeneity. shorter - run concepts of neutral can differ even more because they are influenced by cyclical factors that can vary substantially across countries ( for a discussion of alternative definitions of neutral rates, see box 1 in mendes, 2014 )