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

6

-2

0

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/

7

The transmission of monetary policy

8

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

9

0

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.

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

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

-2

0

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.

a

Key risks identified in the June Financial System Review

13

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.

14

15

Counterfeiting has fallen to very low levels

326

221

105 76

45 35 34 28 29 36

< 100

< 50

< 30

0

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

16

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 of 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

17

Output across industries is progressing along different tracks

18

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

19

2014 2015

Prices of base metals have continued to weaken

20

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

21

-10

-8

-6

-4

-2

0

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

22

0

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

23

0

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

24

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

25

-4

-3

-2

-1

0

1

2

3

4

5

6

7

-4

-3

-2

-1

0

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

26

-4

-3

-2

-1

0

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

27

-1

0

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