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

Promoting Canada’s economic and financial well-being

Remarks to the Chambre de commerce francophone de Saint-Boniface Winnipeg, Manitoba 16 September 2015

Agathe Côté Deputy Governor Bank of Canada

Overview

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

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Mandate

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The Bank’s mandate

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

• Monetary policy
• Financial system
• Currency
• Funds management

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Key responsibilities: Monetary policy

Our objective: To 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: mission accomplished

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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: July 2015 Sources: Statistics Canada and Bank of Canada calculations

February 1991

Renewal of the inflation-targeting agreement in 2016

The inflation-targeting agreement between the federal government and the Bank is renewed every five years. Three main questions for 2016 renewal:

• Is 2 per cent the optimal level of the inflation target?
• How should monetary policy integrate financial stability

considerations?

• Should CPIX continue to be our main guide?

More information at http://www.bankofcanada.ca/core- functions/monetary-policy/renewing-canadas-inflation-control-agreement/

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The transmission of monetary policy

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Bank of Canada’s policy interest rate Commercial interest rates Asset prices Exchange rate Expectations Inflation at 2%

Demand/Supply balance

Demand Supply

Central bank policy rates at historic lows

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

Policy interest rates, daily data

Last observation: 9 September 2015 Sources : Bank of Canada, U.S. Federal Reserve, European Central Bank and Bank of Japan

Key responsibilities: financial system

Our objective: To 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 regulatory authorities.

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Principal activities to promote stability of financial system

The Bank

• provides liquidity and acts as lender of last resort
• oversees systemically important financial market

infrastructures and prominent payment systems

• contributes to development of policies governing the

financial system

• assesses vulnerabilities and risks

– publishes findings in the Financial System Review

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Main vulnerabilities identified in the June Financial System Review

12 100 110 120 130 140 150 160 170 180 2000 2003 2006 2009 2012 2015 % Debt-to-income ratio

Elevated Household Debt

Last observation: 2015Q2 Sources: Statistics Canada and Bank of Canada calculations

Debt-to-disposable income ratio

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2 4 6 8 10 12 2012 2013 2014 2015 % British Columbia and Ontario Alberta and Saskatchewan Eastern Canada Manitoba

Elevated House Prices

6-month moving average of year-over-year growth in seasonally adjusted average prices

Last observation: August 2015 Sources: Canadian Real Estate Association and Bank of Canada calculations

• a. Eastern Canada consists of all real estate markets in Quebec, Nova Scotia,

New Brunswick, Prince Edward Island, and Newfoundland and Labrador.

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Key risks identified in the June Financial System Review

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The Canadian financial system is robust, but can still be subject to important risks, such as

• household financial stress and a sharp correction in house prices
• a sharp increase in long-term interest rates
• stress emanating from China and other emerging-market

economies

• financial stress from the euro area

Key responsibilities: currency

Our objective: To provide Canadians with bank notes they can use with confidence.

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

• Polymer notes are secure, durable, innovative and

easy to handle.

• 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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Counterfeiting has fallen to very low levels

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. Source: Bank of Canada

MTP target ppm

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

• f payments among

financial institutions Canada Savings Bonds Program Our objective: To act as fiscal agent and provide banking services to the federal government and other key players in the financial system

Key responsibilities: funds management

Economic outlook

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Output across industries is progressing along different tracks

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98 100 102 104 106 108 2013 2014 2015 Index 3-month moving average; index: January 2013 = 100

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

Note: The oil and gas industries include the extraction, support activities and engineering construction sectors. The non-energy commodities industries exclude printing and food manufacturing.

Oil and gas Non-energy commodities Rest of the economy

83 per cent of GDP 9 per cent of GDP 8 per cent of GDP

20 40 60 80 100 120 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep US$/barrel WCS crude oilᵃ WTI crude oilᵇ Brent crude oil Daily data

Last observation: 9 September 2015 Source: Bank of Canada

• a. WCS refers to Western Canada Select.
• b. WTI refers to West Texas Intermediate.

Oil prices remain low

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2014 2015

Prices of base metals have continued to weaken

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70 100 130 160 2010 2011 2012 2013 2014 2015 Index Base metals Forestry products Agricultural products Index: January 2010 = 100

Last observation: September 2015 Source: Bank of Canada Note: The value for September 2015 is the average of daily data up to 7 September.

The sharp drop in oil prices has reduced real gross domestic income

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2 4 6 2011 2012 2013 2014 2015 % Terms of trade Real gross domestic income (GDI) Real GDP Year-over-year percentage change at an annual rate, quarterly data

Last observation: 2015Q2 Source: Statistics Canada

The current level of the Canadian dollar is consistent with its historical relationship with oil prices

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100 200 300 400 500 600 80 100 120 140 160 180 200 2000 2002 2004 2006 2008 2010 2012 2014 2016 Index Index Can$ vis-à-vis US$ (left scale) Crude oil index (right scale) Index: January 2000 = 100

Last observation: August 2015 Source: Bank of Canada Note: The crude oil index is a subindex of the Bank of Canada Commodity Price Index (BCPI) that is composed of prices for West Texas Intermediate, Western Canada Select and Brent crude oil.

U.S. economic activity is expected to accelerate

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1 2 3 4 5 6 2013 2014 2015 2016 2017 % Bank of Canada's foreign activity measure U.S. real GDP Forecast Forecast Year-over-year percentage change

Last observation: Last data plotted: 2017 Sources: U.S. Bureau of Economic Analysis and Bank of Canada projections, Monetary Policy Report, July 2015

Export sectors more sensitive to the exchange rate have regained momentum

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95 100 105 110 115 120 125 2013 2013 2013 2014 2014 2014 2015 2015 Index More sensitive to exchange rate Less sensitive to exchange rate 3-month moving average; index: January 2013 = 100 Last observation: July 2015 Sources: Statistics Canada and Bank of Canada calculations

After contracting in the first half of 2015, economic activity is expected to recover

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1 2 3 4 5 6 7

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1 2 3 4 5 6 7 2010 2011 2012 2013 2014 2015 2016 2017 Percentage points % Business fixed investment (right scale) Net exports (right scale) Other components of GDP (right scale) GDP growth, at annual rates (left scale)

Contributions to real GDP growth; 4-quarter moving average

Sources: Statistics Canada and Bank of Canada projections, Monetary Policy Report, July 2015

Private forecasters expect Manitoba’s economic growth to exceed Canada’s in 2015 and 2016

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1 2 3 4 2009 2010 2011 2012 2013 2014p 2015f 2016f Canada Manitoba Annual Percentage Change of Real GDP

Last data plotted: 2016 Sources: Statistics Canada, Conference Board of Canada, Bank of Nova Scotia, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Montreal, Royal Bank of Canada and Bank of Canada calculations Note: Projections are an average of private sector estimates. p = preliminary, f = forecast

%

Inflation is expected to return sustainably to 2 per cent in the first half of 2017

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1 2 3 4 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 % Control range Total CPI Core CPIᵃ Target Year-over-year percentage change, quarterly data

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