Opening statement of the press conference on the Monetary Policy Report

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Hello. Please join me in discussing today’s political announcement and the Monetary Policy Report (MPR).

My message today is twofold.

First, the economic outlook has improved and the Board of Governors is more confident in the resilience of the economy to the pandemic. Canadian households and businesses are adapting to the virus, finding new ways to shop, serve customers and work remotely. More importantly, vaccine rollout is progressing and we expect better times.

But second, most of Canada now faces more contagious variants of the virus. The third wave introduced a new dimension of uncertainty and strained health care resources in some areas. This will slow the return to work of many low-wage workers, young people and women in hard-to-reach sectors who have suffered the brunt of job losses throughout the pandemic. Too many Canadians are left out of work and there is still a huge supply surplus in the economy. I understand how difficult this third wave is for Canadians hoping to return to work and for businesses struggling to cope with the latest restrictions. I know that the toll has been enormous and that this latest setback is difficult. You can be sure that the Bank of Canada will continue to support Canadians and the Canadian economy throughout the recovery.

Before moving on to the political discussions of the Governing Council, let me say a word about the format of the MPR itself. You’ll notice two new boxes in the report – Boxes 2 and 3 – that look at the changes to the global and Canadian projections since January. We have added these boxes to improve the transparency of our analysis and to explain more clearly the changes made to our forecasts. We intend to make this a regular feature of our MPR and look forward to your feedback on this innovation.

Let me now turn to the deliberations of the Board of Governors.

We’ve spent a lot of time talking about incoming economic data. The first quarter now looks much stronger than we expected in January. This partly reflects a better global context, particularly in the United States. The recovery in the United States is supported by a rapid deployment of vaccines and substantial fiscal stimulus, leading to positive spinoffs for Canada through increased export demand and higher commodity prices.

But the most important factor in the unexpected economic strength has been the resilience and adaptability of Canadian households and businesses. The lockdowns of the second wave had a much smaller economic impact than during the first wave. And as the restrictions were relaxed, the economy rebounded quickly with substantial job gains in February and March. The third wave is yet another setback, and we can expect some of those job gains to be wiped out. But the performance of the economy in recent months has reinforced our confidence in the underlying strength of the recovery.

As vaccine roll-out progresses, we expect strong consumer-led growth in the second half of this year. Federal and provincial government fiscal stimulus will also make a significant contribution to growth. Strong growth in foreign demand and rising commodity prices are expected to lead to a strong rebound in exports and business investment, leading to a more widespread recovery. Overall, we now expect the economy to grow by around 6½ percent this year, slowing to around 3¾ percent in 2022 and 3¼ percent in 2023.

You will not be surprised to learn that we have also spent some time discussing what is happening in the housing market. The pandemic has led to unique circumstances. With so many households working and studying at home, we are seeing a lot of people who want more living space. And interest rates have been unusually low, making borrowing more affordable. While the resulting house price increases are rooted in fundamentals, we are seeing some signs of extrapolative expectations and speculative behavior.

Given the high levels of household debt and the risks that households could oversize in the face of rising house prices, we welcome the recent proposal by the Superintendent of Financial Institutions to introduce a fixed floor for the minimum rate of qualification for uninsured mortgages. The new measures just announced in the federal budget will also help. We are following developments in the housing market very closely, and we will have more to say about this in our Financial system review next month.

The Governing Council also spent time discussing estimates of the economy’s room for maneuver and prospects for potential growth. With an economy more resilient to the pandemic and the rollout of vaccines, we hope there will be less scarring in the labor market and less loss of capacity than we previously feared. Bankruptcies have been low, and investment intentions surveys and our own business outlook survey suggest that many companies are stepping up investments in digital technologies. These factors are reflected in our decision to increase our estimate of the economy’s potential output.

But it should be noted that there is considerable uncertainty surrounding our estimate of potential output. We have never seen a recession or a recovery like this. The pandemic continues to have very different impacts across sectors, companies and groups of workers. In addition, economic restrictions have affected both demand and supply, making it more difficult to interpret economic signals. All of this means that as the recovery continues, we will be paying attention to a wide range of indicators of a slowdown, including a range of labor market measures.

Of course, we also discussed the outlook for inflation. It is known that over the next few months, inflation will rise due to the effects of the base year, which simply reflect the impact a year later of the fall in certain prices at the start of the pandemic. When combined with a further rise in gasoline prices, we expect inflation to temporarily rise above our control range of 1% to 3%. The Board of Governors is reviewing this temporary increase.

We expect inflation to fall back to around 2% in the second half of this year and continue to decline due to excess capacity in the economy. Inflation is then expected to return to 2% on a sustained basis, the slowdown being absorbed in the second half of 2022.

In view of the improving economic outlook and the significant slowdown that remains, the Governing Council considered that the recovery still required extraordinary monetary policy support. We remain committed to keeping the policy interest rate at the effective lower limit until the economic downturn is absorbed, so that the 2% inflation target is met on a sustainable basis. Based on the Bank’s latest projections, this is now expected to occur in the second half of 2022. In the current context, however, there is considerable uncertainty about the timing, especially in light of the complexity of the assessment. supply and demand. I mentioned this earlier.

Our forecasts continue to be strengthened and supplemented by our quantitative easing (QE) program. We have decided to adjust the program to a target of weekly net purchases of $ 3 billion of Government of Canada bonds. This represents a decrease from a minimum of $ 4 billion per week, as we will maintain broadly the same composition by maturity of our purchases. This adjustment in the amount of additional stimulus added each week is consistent with the progress towards economic recovery that we have already seen.

Going forward, further adjustments to the pace of net buying will be guided by our continued assessment of the strength and sustainability of the economic recovery. If the recovery moves in line with or stronger than in our last projection, then the economy will not need as much QE stimulus over time. Further adjustments to our QE program will be incremental and we will be deliberate both in our assessment of incoming data and in communicating our analysis.

We are committed to providing the appropriate degree of monetary policy stimulus to support the recovery and meet the inflation target.

With that, let me stop and turn to you for questions.

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