Promoting Canadas economic and financial well-being Remarks to the - - PowerPoint PPT Presentation

Promoting Canada’s economic and financial well-being

Remarks to the Kelowna Chamber of Commerce Kelowna, British Columbia 25 March 2015

Timothy Lane Deputy Governor Bank of Canada

Overview

• What does the Bank of Canada do?
• What is Canada’s economic outlook?

2

Mandate

3

The Bank’s mandate

The Bank of Canada’s mandate is to contribute to the economic well-being of Canadians. Four key responsibilities:

• Monetary policy
• Financial system
• Currency
• Funds management

4

Key Responsibilities: Monetary policy

Our objective: T

• safeguard confidence in the value of money by

keeping inflation low, stable and predictable.

• target of 2 per cent established in agreement with the federal

government

Benefits:

• greater certainty of future buying power
• lower interest rates
• lower unemployment rate and more stable economic growth

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Monetary Policy: Low and stable inflation

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February 1991

• 2

2 4 6 8 10 12 14 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 % Control range CPI Inflation target

12-month rate of increase, monthly data

Last observation: February 2015 Sources: Statistics Canada and Bank of Canada calculations

Inflation targeting

• Under normal circumstances, one instrument: the policy rate
• Policy rate decisions announced eight times a year on a fixed

schedule

• Flexible exchange rate
• Transparency improves the effectiveness of policy
• Monetary policy must be forward looking and incorporate all relevant

information – several economic models – consult extensively

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Central bank policy rates are at historic lows

8

• 1

1 2 3 4 5 2008 2009 2010 2011 2012 2013 2014 2015 % Canada United States Euro area Japan

Last observation: 6 March 2015 Sources: Bank of Canada, U.S. Federal Reserve, European Central Bank and Bank of Japan

Daily data

Key responsibilities: Financial system

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Key responsibilities: Financial system

Our objective: T

• promote the stability and efficiency of the financial

system. Canada’s financial system includes:

• financial institutions
• financial markets
• clearing and settlement systems

The Bank shares responsibility for financial stability with other authorities.

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Activities to promote the stability of the financial system

The Bank:

• provides liquidity and acts as lender of last resort
• oversees systemically important payment clearing and

settlement systems

• contributes to development of policies governing the financial

system

• assesses vulnerabilities and risks

– publishes findings in Financial System Review

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Key risks identified in the December Financial System Review

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Main vulnerabilities identified in the December Financial System Review

13 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 House-price-to-income ratio and linear trend

Last observation: 2014Q4 Sources: Statistics Canada, Canadian Real Estate Association and Bank of Canada calculations

80 90 100 110 120 130 140 150 160 170 %

Last observation: 2014Q3 Source: Statistics Canada

Vulnerability 1: High rates of household debt Vulnerability 2: House prices in Canada are still high relative to disposable income

Key responsibilities: Currency

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Key responsibilities: Currency

Our objective: T

• provide Canadians with bank notes that they can use

with confidence.

 Fewer than 30 counterfeits detected annually per million notes in circulation

• Polymer notes are safer, cheaper and greener.
• Demand for bank notes continues to grow at the same rate as the

economy.

• We have launched a research program on digital currency.

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Transparent, holographic polymer bank notes

16

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Counterfeiting is much lower than it was 10 years ago

326 221 105 76 45 35 34 28 29 36 < 100 < 50 < 30 100 200 300 400 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number of counterfeit bank notes detected per million notes in circulation*

PPM MTP Target Parts per million (ppm)

* Target for the 2013-15 Medium Term Plan is below 30 ppm

MTP target ppm

Key responsibilities: Funds management

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Manage Canada’s foreign exchange reserves and federal government’s cash balances as well as public debt with the Department of Finance Provide the means of final settlement of daily flows

• f payments among

financial institutions Canada Savings Bonds Program

Economic outlook

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Global growth has disappointed but is picking up

1 2 3 4 5 6 Pre-crisis average 2000-07 2010 2011 2012 2013 2014 2015 2016 %

Year-over-year percentage change

Last data plotted: 2016 Source: Bank of Canada projections, January 2015

Forecast

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Oil prices have fallen dramatically since mid-2014

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25 50 75 100 125 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 US$/barrel WCS crude oil WTI crude oil Brent crude oil

Daily data

Last observation: 6 March 2015 Note: WCS refers to Western Canada Select and WTI refers to West Texas Intermediate. Source: Bank of Canada

January Report

Persistently low oil prices could make some Canadian production uneconomical

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 20 40 60 80 US$/barrel Global crude oil production (millions of barrels per day)

Average of full-cycle costs less dividends and interest payments

Note: Production for which the full-cycle costs are above the line could become uneconomical if oil prices stay around US$60 per barrel. Red bars indicate members of OPEC; blue bars are other

• il-producing countries.

Source: Energy Aspects

Other OPEC Saudi Arabia Russia U.S. ex. shale Kazakhstan Norway China Other non-OPEC Mexico Brazil U.S. shale Canada oil sands

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The sharp drop in oil prices will weigh on the economy…

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• 8
• 6
• 4
• 2

2 4 2012 2013 2014 2015 2016 % Terms of trade Real gross domestic income (GDI) Real GDP

Year-over-year percentage change, quarterly data

Sources: Statistics Canada and Bank of Canada projections, January 2015

… but the improving U.S. economy helps boost exports

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1 2 3 4 5 2014Q1 2014Q2 2014Q3 2014Q4 % U.S. GDP Bank of Canada's foreign activity measure

Year-over-year percentage change

Last observation: 2014Q4 Sources: U.S. Bureau of Economic Analysis and Bank of Canada

The economy is still operating below potential

25

• 5
• 4
• 3
• 2
• 1

1 2 3 2007 2008 2009 2010 2011 2012 2013 2014 % Structural approach Statistical approach

Last data plotted: 2014Q4 Note: From the January 2015 Monetary Policy Report. Estimates for the fourth quarter of 2014 are based on an increase in output of 2.5 per cent (at annual rates) for the quarter. Source: Bank of Canada

Excess capacity in the Canadian economy

5 6 7 8 9 2007 2008 2009 2010 2011 2012 2013 2014 2015 % Unemployment rate Labour market indicator (LMI)

Last observation: February 2015 Sources: Statistics Canada and Bank of Canada

Labour market slack is greater than indicated by the unemployment rate

Monthly data

Growth will slow in 2015 before returning to potential

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• 1

1 2 3 4 5

• 1

1 2 3 4 5 2010 2011 2012 2013 2014 2015 2016 Percentage points % Business fixed investment (right scale) Exports (right scale) Other components of GDP (right scale) GDP growth, at annual rates (left scale)

Sources: Statistics Canada and Bank of Canada projections, January 2015

Contributions to real GDP growth; 4-quarter moving average

T

• tal inflation is falling owing to lower oil prices, but core

inflation remains close to 2 per cent

27

• 1

1 2 3 4 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 %

Control range Target Core CPIᵃ Total CPI

Total CPI inflation is expected to drop below 1 per cent in 2015

Year-over-year percentage change, quarterly data

a.CPI excluding eight of the most volatile components and the effect of changes in indirect taxes on the remaining components Sources: Statistics Canada and Bank of Canada projections, January 2015

British Columbia’s economic growth has been similar to Canada’s in recent years

28

• 4
• 2

2 4 2008 2009 2010 2011 2012 2013 2014 2015 % Canada B.C.

Year-over-year percentage change, annual data

Note: Projections are an average of private sector estimates. Sources: Statistics Canada, Bank of Montreal, Bank of Nova Scotia, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Bank of Canada calculations

Forecast British Columbia

Population aging is more pronounced in British Columbia, especially in Kelowna

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15 20 25 30 35 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 % Canada British Columbia Kelowna

Old-age dependency ratio, annual data

Last observation: December 2014 Note: The old-age dependency ratio is defined as the ratio of the population that is above the age of 64 to the population between the ages of 15 and 64. Sources: Statistics Canada and Bank of Canada calculations

T

• urism in British Columbia is outpacing tourism in Canada

30

• 6
• 4
• 2

2 4 6 8 10 Jan-2012 Jul-2012 Jan-2013 Jul-2013 Jan-2014 Jul-2014 % Canada British Columbia

Growth in international visitors

Year-over-year percentage change

Last observation: December 2014 Source: Statistics Canada

Proposed investment projects in British Columbia have been rising

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50 100 150 200 250 300 350 400 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 $ billions Started Proposed

Major investment projects in British Columbia

Billions of dollars, quarterly data

Last observation: 2014Q3 Source: BC Major Projects Inventory, Business Council of British Columbia

Questions?

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