Category: Economic

Building the next generation of models that incorporate advances in economic knowledge and technology is a priority for the Bank of Canada, Governor Stephen S. Poloz said today.

In a speech to the University of Alberta School of Business, Governor Poloz said that the work of building models needs constant investment, given how long it can take to develop a new model. “In the Bank’s most recent medium-term plan, we identified as a core priority the need to reinvent central banking, in part by refreshing and upgrading the tools we use,” the Governor said. “I want it to be a top priority for the economics profession as well.”

While models have become indispensable tools for economists in making forecasts and understanding how the economy works, central bankers need to be aware of their limits and exercise judgment when using them.

“Economic models are not crystal balls,” Governor Poloz noted. “The fact that models can deliver only an approximation of the truth means that conducting monetary policy is not a mechanical exercise. It is a complex blend of art and science—in effect, it is an exercise in risk management.”

The Bank is currently using state-of-the-art models to forecast the economy and conduct policy analysis, supported by other, smaller tools. However, the 2007–09 financial crisis and its aftermath revealed shortcomings in the current generation of models; in particular, their inability to capture links between the financial system and other sectors of the economy. While the Bank of Canada currently addresses this and other shortcomings by using multiple models, it now needs to construct new models that address these issues.

“Models have struggled to explain the forces that led to the crisis and the behaviour that followed,” Governor Poloz said. “This experience is now guiding the work of model builders.”

While models have become increasingly powerful and sophisticated, policy-makers need to remember that they are simplifications of reality. There is uncertainty surrounding the data that the models use and around the relationships among the economic variables in the models themselves.

The Bank deals with these uncertainties by taking a risk-management approach to monetary policy. “Interpreting, weighing and managing those risks approaches art, but the art is built on the science represented by our models,” the Governor concluded.

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The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States. The Bank has made initial assumptions about prospective tax policies only, resulting in a modest upward revision to its US growth outlook. Overall, the global economy is strengthening largely as expected and prices of some commodities, including oil, have risen. The rapid back-up in global bond yields, partly reflecting market anticipation of US fiscal expansion, has pulled up Canadian yields relative to the October Monetary Policy Report (MPR).

In contrast to the United States, Canada’s economy continues to operate with material excess capacity. While employment growth has remained firm, indicators still point to significant slack in the labour market. The resource sector’s adjustment to past commodity price declines appears to be largely complete, but negative wealth and income effects will persist. Meanwhile, the Canadian dollar has strengthened along with the US dollar against other currencies, exacerbating ongoing competitiveness challenges and muting the outlook for exports. Consumption is expected to remain solid, while residential investment will be tempered by previously announced changes to housing finance rules and by mortgage rates that have risen in response to higher bond yields. Federal and provincial fiscal measures are still expected to support growth in 2017.

Bearing in mind the important assumptions embedded in its forecast, the Bank projects that Canada’s real GDP will grow by 2.1 per cent in both 2017 and 2018. This implies a return to full capacity around mid-2018, in line with October’s projection.

Inflation in Canada has been lower than anticipated since October, mainly because of declines in food prices. Measures of core inflation are below 2 per cent, reflecting material excess capacity in the economy. As consumer energy prices rise and the impact of lower food prices dissipates, inflation is expected to move close to the 2 per cent target in the months ahead and remain there throughout the projection horizon while excess capacity is being absorbed.

In the context of a projection that is largely unchanged, the Bank’s Governing Council judges that the current stance of monetary policy is still appropriate and maintains the target for the overnight rate at 1/2 per cent. Governing Council will continue to assess the impact of ongoing developments, mindful of the significant uncertainties weighing on the outlook.

Information note

The next scheduled date for announcing the overnight rate target is 1 March 2017. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 12 April 2017.

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The overall level of risk to Canada’s financial system remains largely unchanged from six months ago, the Bank of Canada said today in the Financial System Review (FSR). The Bank continues to highlight two key vulnerabilities related to Canadian households: high levels of indebtedness and housing market imbalances. A third ongoing vulnerability is the potential for fragility in fixed-income market liquidity.

Nonetheless, the Canadian financial system remains resilient as the nation’s economy improves and financial reforms in Canada and worldwide progress.

Since June, the proportion of highly indebted households has continued to rise in many cities, notably in the Greater Toronto Area. Nationally, house prices continue to increase relative to income, although significant regional divergences persist. Imbalances in some regional housing markets make it more likely that adverse economic shocks could cause large declines in prices.

This buildup of vulnerabilities will be mitigated over time by new federal housing finance rules and other housing sector policies, which will dampen activity in the sector and improve the quality of new mortgages. While the impact of these measures will be concentrated in regions where house prices are the highest relative to income, such as Vancouver, Toronto and Calgary, they will also have important effects at a national level.

“These macroprudential policies will raise the underlying quality of household indebtedness over time, as well as financial institutions’ capital requirements and pricing criteria, which will make them more resilient to future shocks,” Governor Stephen S. Poloz said. “Accordingly, these policies will help mitigate financial stability risks over time.”

In view of the household vulnerabilities identified in the FSR, the most important risk remains household financial stress and a sharp correction in house prices, triggered by a large and persistent nationwide rise in unemployment. The likelihood of this risk materializing, however, remains low.

Other key risks are a sharp increase in long-term interest rates driven by higher global risk premiums, stress emanating from China and emerging-market economies, and prolonged weakness in commodity prices.

The December issue also features three reports written by Bank of Canada staff:

• Monitoring Shadow Banking in Canada: A Hybrid Approach
• The Rise of Mortgage Finance Companies in Canada: Benefits and Vulnerabilities
• Toward More Resilient Markets: Over-the-Counter Derivatives Reform in Canada

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Governor Stephen S. Poloz, Minister of Finance Bill Morneau and Minister of Status of Women Patty Hajdu today announced that Viola Desmond will be featured on a new $10 bank note, expected in late 2018. This will mark the first time that a portrait of a Canadian woman will be featured on a regularly circulating Bank of Canada note.

Desmond, an icon of the human rights and freedoms movement in Canada, was selected from a short list of five iconic Canadian women by Minister Morneau, in accordance with the Bank of Canada Act. A successful Nova Scotia businesswoman, she is known for defiantly refusing to leave a whites-only area of a movie theatre in 1946. She was subsequently jailed, convicted and fined. Her court case was the first known legal challenge against racial segregation brought forth by a Black woman in Canada.

“Today is about recognizing the incalculable contribution that all women have had and continue to have in shaping Canada’s story. Viola Desmond’s own story reminds all of us that big change can start with moments of dignity and bravery,” said Minister Morneau. “She represents courage, strength and determination—qualities we should all aspire to every day.”

Joining Governor Poloz and Ministers Morneau and Hajdu at the Canadian Museum of History for the announcement was one of Viola Desmond’s sisters, Wanda Robson.

“It’s a big day to have a woman on a bank note, but it’s an especially big day to have your big sister on a bank note. Our family is extremely proud and honoured,” said Robson, who was instrumental in making Desmond’s story widely known.

The selection of Viola Desmond is the final step in the #bankNOTEable campaign to choose an iconic Canadian woman to appear on this new bank note. Last spring, an open call for nominations launched by the Bank yielded more than 26,300 submissions from across Canada, resulting in 461 eligible candidates. An independent Advisory Council composed of eminent Canadian academic, sport, cultural and thought leaders narrowed down the list to five candidates for consideration by the Minister of Finance.

“Canadians were extremely engaged, which made our consultation process very successful,” said Governor Poloz. “Through this exciting process, with every mouse click or turn of a book’s page, with every kitchen table discussion or classroom debate, Canadians learned more about the iconic women who built Canada.”

Minister Hajdu said, “Many extraordinary women could have been on this next bank note, and the search and decision-making process were extremely thorough. The choice of Viola Desmond reminds us that Canada is a diverse country where everyone deserves equality and respect.”

Notes to Editors:

• This new $10 bank note will reflect the broader themes of social justice and the struggle for rights and freedoms. It will be the first note in the next series.
• The introduction of the Viola Desmond $10 note provides an opportune time to break from tradition and feature other prominent Canadians who have made their mark on the history of our country.
• To continue to celebrate more iconic Canadians, the next $5 note will also feature a new Bank NOTE-able Canadian. In due course, the Bank will launch another consultation process to seek input from Canadians on the design of that $5 note, building on the successes of this most recent process.
• Since Viola Desmond will be featured on the $10 note and another iconic Canadian will be featured on the future $5 note, Canada’s first Prime Minister, Sir John A. Macdonald, and our first francophone Prime Minister, Sir Wilfrid Laurier, will be honoured on our higher-value bank notes. This change will take place when the higher-value notes are redesigned for the next series.
• These changes mean that former prime ministers William Lyon Mackenzie King and Sir Robert Borden will no longer be portrayed on bank notes.
• The $20 denomination will continue to feature the reigning monarch.
• Additional biographical information about Viola Desmond is available on the Bank’s website.
• View the Heritage Minute video about Viola Desmond, courtesy of Historica Canada.
• Download photos from today’s event on the Bank of Canada’s Flickr gallery.
• Find out more about the selection and public consultation process that led to the choice of Viola Desmond and the approach to Canada’s next series of bank notes.
• Additional biographical information about the Advisory Council members is available on the Bank’s website.
• Find out more about our Principles for Bank Note Design.
• Consult the Bank of Canada’s bank notes web pages.

• Please note: At the request of the family, media wishing to speak with Viola Desmond’s relatives are kindly asked to contact the Bank of Canada Media Relations team.

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