Monetary Policy Report Opening statement of the press conference

Hello. I am pleased to be here with you to discuss today’s policy announcement and Bank of Canada policy Monetary Policy Report (MPR). I am especially pleased to welcome Senior Deputy Governor Carolyn Rogers for her first press conference. She joined the Board of Governors at an important time.

Our message today is threefold.

First, the emergency monetary measures needed to support the economy during the pandemic are no longer needed and have ended.

Second, interest rates will have to rise to control inflation. Canadians should expect higher interest rates.

Third, although reopening our economy after repeated waves of the COVID-19 pandemic is complicated, Canadians can be confident that the Bank of Canada will control inflation. We are determined to get inflation back on target.

Let me take each of these elements in turn.

The Bank’s response to the pandemic has been forceful. Throughout, our actions have been guided by our mandate. We have been resolute and deliberate, communicating clearly with Canadians about our extraordinary measures to support the economy and the terms of their exit. When we introduced emergency liquidity measures to support key funding markets, we said they would end when market functioning was restored. And they did. When we launched quantitative easing (QE), we said it would continue until the recovery was well under way. As the recovery progressed, we began to reduce QE and ended it in October. Today marks the final step in exiting emergency policies. We said exceptional forward guidance would continue until the economic downturn subsides. With the strength of the recovery until the second half of 2021, the Governing Council now considers that this condition is met. We are therefore withdrawing our commitment to maintain our key rate at its floor of 0.25%.

Second, we want to make it clear that we expect interest rates to rise. Many factors are contributing to the uncomfortably high inflation we are experiencing today, and many of them are global and reflect the unique circumstances of the pandemic. As the pandemic subsides, conditions will normalize and inflation will decline. However, with Canadian labor markets tightening and capacity pressures increasing, the Governing Council expects higher interest rates will be needed to bring inflation back to the 2% target. .

Finally, Canadians can be assured that the Bank of Canada will control inflation. The prices of many goods and services are rising rapidly, making it harder for Canadians to make ends meet, especially for those on low incomes. Prices for food, gasoline and housing all rose faster than usual. We expect inflation to stay close to 5% in the first half of 2022 and then decline. There is some uncertainty as to how quickly inflation will come down, as we have never experienced a pandemic like this before. But Canadians can rest assured that we will use our monetary policy tools to control inflation.

Let me touch on the economic outlook that we described in our MPR.

Globally, the pandemic recovery is strong but uneven and continues to be marred by supply chain disruptions. The strength in demand for goods combined with these supply issues and rising energy prices has pushed up global inflation. With this rise in inflation, expectations of a reduction in monetary stimulus have been pushed back and financial conditions have tightened from very accommodative levels.

In Canada, growth in the second half of 2021 was even stronger than we expected, and a wide range of metrics now suggest that the economic slowdown has subsided. With the rapid spread of the Omicron variant, first quarter growth is expected to be modest, but we expect the impact on our economy to be less severe than previous waves. We expect annual growth in economic activity to be 4% this year and around 3½% in 2023, as consumer spending on services rebounds and business investment and exports show solid growth.

CPI inflation is currently well above our target range and core measures have risen slightly. Global supply chain disruptions, weather-related agricultural commodity price increases and high energy prices have put upward pressure on inflation in Canada, and this is expected to continue over the course of the year. of the next few months. These pressures are expected to ease in the second half of 2022, and inflation is expected to decline fairly quickly to around 3% by the end of the year. Longer term, we expect demand to moderate and supply to increase as productivity improves. This will ease price pressures and gradually bring inflation back close to the 2% target in 2023 and 2024.

Allow me now to say a few words about the deliberations of the Board of Governors.

Of course, we discussed the impact of Omicron. Renewed restrictions and household caution about this highly contagious variant have temporarily slowed economic activity. Once again, the high-contact service sectors were the hardest hit. But with many more Canadians infected in this wave, worker absences have been more widespread. Our high vaccination rates and adaptability to restrictions should limit the downside economic risks of this wave.

The Board of Governors has also spent considerable time assessing the overall balance of supply and demand in the economy. In October, we expected the output gap to close in the middle of this year’s quarters. Although measuring the output gap is still uncertain and pandemic-related distortions make assessing supply more complicated, a wide range of indicators clearly suggest that the economic downturn has been absorbed faster than foreseen. Employment is above pre-pandemic levels, businesses are struggling to fill vacancies and wage increases are accelerating. Inequality between sectors remains, but taking all the evidence together, the Governing Council judges that the economy is now operating close to capacity.

We debated the most likely path for inflation. Resolving global supply bottlenecks has important implications for inflation in Canada. There is evidence that supply disruptions may have peaked, but the spread of Omicron is a new wildcard that could further disrupt global supply chains. We also considered the possibility of some reversal of strong commodity price increases. This would bring inflation down faster than expected. Overall, we judged the risks surrounding our inflation projection to be reasonably balanced.

We also assessed more domestic sources of inflationary pressures. While global goods price inflation is expected to ease, tighter Canadian labor markets, rising house prices and evident capacity pressures suggest that if demand continues to grow faster than supply , this will put upward pressure on inflation.

We noted that measures of inflation expectations are broadly in line with our own forecasts, with longer-term expectations remaining well anchored on the 2% target. We agreed that it is essential to ensure that higher inflation expectations in the short term do not turn into higher expectations in the long term and become embedded in ongoing inflation.

Putting all this together, we concluded that, consistent with our forecast, an upward path in interest rates will be needed to moderate spending growth and bring inflation back to target.

Of course, we discussed when to start raising our key interest rate. Our approach to monetary policy throughout the pandemic was deliberate, and we were aware that the rapid spread of Omicron would dampen spending in the first quarter. We have therefore decided to keep our key rate unchanged today, to withdraw our commitment to keep it at its floor and to signal that rates should increase in the future. As we indicated in our press release this morning, the timing and pace of these increases will be guided by the Bank’s commitment to achieving the 2% inflation target.

We take our communications with Canadians very seriously. For nearly two years now, we have told Canadians that we will keep our policy rate at its lowest level until the economic downturn subsides. With the slack being taken up faster than expected, it’s time to remove our extraordinary forward orientation. This ends our emergency policy and signals that interest rates will now be on an upward trajectory. This is a significant change in monetary policy, and we felt it was appropriate to move forward in a series of deliberate steps.

Let me say a final word about another important monetary policy tool: our balance sheet. The Bank will keep the holdings of Government of Canada bonds on its balance sheet roughly constant at least until we begin to raise the key interest rate. At that time, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing Government of Canada bonds to retire. As we have done in the past, before we implement changes to our balance sheet management, we will provide more information about our plans.

With that, Senior Deputy Governor Rogers and I would be happy to answer your questions.

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