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 o 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 5

Monetary Policy: Low and stable inflation % 12-month rate of increase, monthly data 14 February 1991 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Control range CPI Inflation target Sources: Statistics Canada and Bank of Canada calculations Last observation: February 2015 6

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 7

Central bank policy rates are at historic lows % Daily data 5 4 3 2 1 0 -1 2008 2009 2010 2011 2012 2013 2014 2015 Canada United States Euro area Japan Sources: Bank of Canada, U.S. Federal Reserve, European Central Bank and Bank of Japan Last observation: 6 March 2015 8

Key responsibilities: Financial system 9

Key responsibilities: Financial system Our objective: T o 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. 10

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 11

Key risks identified in the December Financial System Review 12

Main vulnerabilities identified in the December Financial System Review Vulnerability 2: House prices in Canada are still high % Vulnerability 1: High rates of household debt relative to disposable income 170 House-price-to-income ratio and linear trend 5.5 160 5.0 150 140 4.5 130 4.0 120 3.5 110 3.0 100 2.5 90 2.0 80 Sources: Statistics Canada, Canadian Real Estate Association and Bank of Canada calculations Last observation: 2014Q4 Source: Statistics Canada Last observation: 2014Q3 13

Key responsibilities: Currency 14

Key responsibilities: Currency Our objective: T o 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. 15

Transparent, holographic polymer bank notes 16

Counterfeiting is much lower than it was 10 years ago Number of counterfeit bank notes detected per million notes in circulation* Parts per million (ppm) 400 300 200 326 < 100 221 100 < 50 < 30 105 76 45 36 35 34 29 28 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ppm PPM MTP Target MTP target * Target for the 2013-15 Medium Term Plan is below 30 ppm 17

Key responsibilities: Funds management Provide the means of final Manage Canada’s foreign settlement of daily flows exchange reserves and federal of payments among government’s cash balances as financial institutions well as public debt with the Department of Finance Canada Savings Bonds Program 18

Economic outlook 19

Global growth has disappointed but is picking up Year-over-year percentage change % 6 5 4 Forecast 3 2 1 0 Pre-crisis 2010 2011 2012 2013 2014 2015 2016 average 2000-07 Source: Bank of Canada projections, January 2015 Last data plotted: 2016 20

Oil prices have fallen dramatically since mid-2014 US$/barrel Daily data 125 January Report 100 75 50 25 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 WCS crude oil WTI crude oil Brent crude oil Note: WCS refers to Western Canada Select and WTI refers to West Texas Intermediate. Source: Bank of Canada Last observation: 6 March 2015 21

Persistently low oil prices could make some Canadian production uneconomical Average of full-cycle costs less dividends and interest payments US$/barrel 80 60 Canada oil sands U.S. shale Brazil non-OPEC Mexico 40 Other China U.S. ex. shale Kazakhstan Norway Russia OPEC Other 20 Arabia Saudi 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Global crude oil production (millions of barrels per day) 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 oil-producing countries. Source: Energy Aspects 22

The sharp drop in oil prices will weigh on the economy… % Year-over-year percentage change, quarterly data 4 2 0 -2 -4 -6 -8 2012 2013 2014 2015 2016 Terms of trade Real gross domestic income (GDI) Real GDP Sources: Statistics Canada and Bank of Canada projections, January 2015 23

… but the improving U.S. economy helps boost exports % Year-over-year percentage change 5 4 3 2 1 0 2014Q1 2014Q2 2014Q3 2014Q4 U.S. GDP Bank of Canada's foreign activity measure Sources: U.S. Bureau of Economic Analysis and Bank of Canada Last observation: 2014Q4 24

The economy is still operating below potential % Labour market slack is greater than indicated by the Excess capacity in the Canadian economy unemployment rate % 3 Monthly data 9 2 1 8 0 -1 7 -2 -3 6 -4 -5 2007 2008 2009 2010 2011 2012 2013 2014 5 2007 2008 2009 2010 2011 2012 2013 2014 2015 Structural approach Statistical approach Unemployment rate Labour market indicator (LMI) 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 Last data plotted: 2014Q4 Sources: Statistics Canada and Bank of Canada Last observation: February 2015 25

Growth will slow in 2015 before returning to potential Contributions to real GDP growth; 4-quarter moving average % Percentage points 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 2010 2011 2012 2013 2014 2015 2016 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 26

T otal inflation is falling owing to lower oil prices, but core inflation remains close to 2 per cent Total CPI inflation is expected to drop below 1 per cent in 2015 Year-over-year percentage change, quarterly data % 4 3 2 1 0 -1 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Core CPIᵃ Control range Target Total CPI 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 27

British Columbia’s economic growth has been similar to Canada’s in recent years % Year-over-year percentage change, annual data 4 Forecast 2 0 -2 -4 2008 2009 2010 2011 2012 2013 2014 2015 British Columbia Canada B.C. 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 28

Population aging is more pronounced in British Columbia, especially in Kelowna % Old-age dependency ratio, annual data 35 30 25 20 15 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Canada British Columbia Kelowna 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 Last observation: December 2014 29

T ourism in British Columbia is outpacing tourism in Canada Growth in international visitors % Year-over-year percentage change 10 8 6 4 2 0 -2 -4 -6 Jan-2012 Jul-2012 Jan-2013 Jul-2013 Jan-2014 Jul-2014 Last observation: December 2014 Canada British Columbia Source: Statistics Canada 30