The new Bank of Canada governor Stephen Poloz delivered his speech before the House of Commons finance committee this morning. Here are the highlights of his address:
“It is now almost six years since the start of the global financial crisis. Given the near-collapse of the global financial system and the dramatic plunge in global demand, it’s perhaps no surprise that we haven’t yet returned to normal economic conditions.
“The global economy continues to struggle. Most advanced economies are still facing credit stresses and record-low interest rates. Many central banks continue to use unconventional means to provide stimulus, and governments are doing everything they can to manage their respective debt situations.
“Clearly, the global economy is still in recovery. Global economic activity is expected to grow modestly this year before strengthening over the following two years. But this is not a recovery in the usual sense. It’s more like a postwar reconstruction. It will require sustained and focused efforts to rebuild global economic potential.
“As with any plumbing system, we tend to take notice only when things go wrong. Through the crisis and since, the Bank’s work has meant that the resilience of Canada’s payment clearing and settlement system has been maintained at a very high level, ensuring that Canadians can have confidence that the economy is supported by solid financial market infrastructures.
“These are real accomplishments, and our financial system is stronger as a result. But we must not lose momentum, here in Canada or on the international stage. More work is required to end the phenomenon of institutions that are too big to fail, including recovery and resolution plans for banks. And countries need to address the issue of shadow banking to ensure that systemically important financial institutions operating outside the perimeter of regulation come broadly into line with their regulated counterparts.
“Canada’s monetary policy framework is a good one. After a tremendous amount of research, Canada adopted an inflation-targeting regime in 1991. Since 1995, the target has been 2 per cent. We recognized early on that a commitment to hold inflation absolutely steady at 2 per cent was unrealistic. Shocks to the economy must be taken into account. So the framework is designed to keep total CPI inflation at the 2 per cent midpoint of a target range of 1 per cent to 3 per cent over the medium term.
“It bears mentioning that the target is symmetrical. We care just as much about inflation falling below as we do about it rising above the target. The Bank raises or lowers its policy interest rate, as appropriate, in order to achieve the target typically within a horizon of six to eight quarters – the time that it usually takes for policy actions to work their way through the economy and have their full effect on inflation.
“We are now seeing signs of recovery in some important external markets, notably the United States and Japan, and there is continued growth in emerging-market economies. The Bank expects that the gathering momentum in foreign demand should help lift the confidence of Canada’s exporters. This is critical for Canadian firms to boost their investment to expand their productive capacity.
“The Bank has a role to play nurturing that process, to the extent possible within the confines of our inflation-targeting framework. There is no conflict between nurturing this and our need to get inflation up to the 2 per cent target.”