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? 2

Mandate 3

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 4

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 5

Monetary policy: mission accomplished 12-month rate of increase, monthly data % 14 12 February 1991 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: July 2015 6

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/ 7

The transmission of monetary policy Demand/Supply balance Commercial interest rates Bank of Asset prices Canada’s policy Demand Supply interest rate Exchange rate Inflation at 2% Expectations 8

Central bank policy rates at historic lows Policy interest rates, daily data % 5 4 3 2 1 0 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: 9 September 2015 9

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. 10

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 11

Main vulnerabilities identified in the June Financial System Review Elevated Household Debt Elevated House Prices 6-month moving average of year-over-year growth in seasonally adjusted average prices % % 180 12 170 10 160 8 150 6 140 4 130 2 120 0 110 100 -2 2000 2003 2006 2009 2012 2015 2012 2013 2014 2015 British Columbia and Ontario Alberta and Saskatchewan a Eastern Canada Manitoba Debt-to-income ratio Debt-to-disposable income ratio a. Eastern Canada consists of all real estate markets in Quebec, Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador. Sources: Statistics Canada and Bank of Canada calculations Last observation: 2015Q2 Sources: Canadian Real Estate Association and Bank of Canada calculations Last observation: August 2015 12

Key risks identified in the June Financial System Review 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 13

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. 14

Counterfeiting has fallen to very low levels 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. Source: Bank of Canada 15

Key responsibilities: funds management Our objective: To act as fiscal agent and provide banking services to the federal government and other key players in the financial system Manage Canada’s foreign Provide the means of final exchange reserves and settlement of daily flows federal government’s cash of payments among balances as well as public financial institutions debt in collaboration with the Department of Canada Savings Finance Bonds Program 16

Economic outlook 17

Output across industries is progressing along different tracks 3-month moving average; index: January 2013 = 100 Index 108 9 per cent of GDP 106 8 per cent of GDP 104 83 per cent of GDP 102 100 98 2013 2014 2015 Oil and gas Non-energy commodities Rest of the economy 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. Last observation: June 2015 Sources: Statistics Canada and Bank of Canada calculations 18

Oil prices remain low Daily data US$/barrel 120 100 80 60 40 20 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep 2014 2015 WCS crude oilᵃ WTI crude oilᵇ Brent crude oil a. WCS refers to Western Canada Select. b. WTI refers to West Texas Intermediate. Source: Bank of Canada Last observation: 9 September 2015 19

Prices of base metals have continued to weaken Index: January 2010 = 100 Index 160 130 100 70 2010 2011 2012 2013 2014 2015 Base metals Forestry products Agricultural products Source: Bank of Canada Note: The value for September 2015 is the average of daily data up to 7 September. Last observation: September 2015 20

The sharp drop in oil prices has reduced real gross domestic income Year-over-year percentage change at an annual rate, quarterly data % 6 4 2 0 -2 -4 -6 -8 -10 2011 2012 2013 2014 2015 Terms of trade Real gross domestic income (GDI) Real GDP Source: Statistics Canada Last observation: 2015Q2 21

The current level of the Canadian dollar is consistent with its historical relationship with oil prices Index: January 2000 = 100 Index Index 200 600 180 500 160 400 140 300 120 200 100 100 80 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Can$ vis-à-vis US$ (left scale) Crude oil index (right scale) 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 Last observation: August 2015 Intermediate, Western Canada Select and Brent crude oil. Source: Bank of Canada 22

U.S. economic activity is expected to accelerate Year-over-year percentage change % 6 5 4 3 2 1 0 2013 2014 2015 2016 2017 Bank of Canada's foreign activity measure U.S. real GDP Forecast Forecast Sources: U.S. Bureau of Economic Analysis and Bank of Canada projections, Monetary Policy Report, July 2015 Last observation: Last data plotted: 2017 23

Export sectors more sensitive to the exchange rate have regained momentum 3-month moving average; index: January 2013 = 100 Index 125 120 115 110 105 100 95 2013 2013 2013 2014 2014 2014 2015 2015 More sensitive to exchange rate Less sensitive to exchange rate Sources: Statistics Canada and Bank of Canada calculations Last observation: July 2015 24

After contracting in the first half of 2015, economic activity is expected to recover Contributions to real GDP growth; 4-quarter moving average % Percentage points 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 2010 2011 2012 2013 2014 2015 2016 2017 Business fixed investment (right scale) Net exports (right scale) Other components of GDP (right scale) GDP growth, at annual rates (left scale) Sources: Statistics Canada and Bank of Canada projections, Monetary Policy Report, July 2015 25

Private forecasters expect Manitoba’s economic growth to exceed Canada’s in 2015 and 2016 Annual Percentage Change of Real GDP % 4 3 2 1 0 -1 -2 -3 -4 2009 2010 2011 2012 2013 2014p 2015f 2016f Canada Manitoba 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 Last data plotted: 2016 Note: Projections are an average of private sector estimates. p = preliminary, f = forecast 26