Thank you very much, Chair, and good morning, members. Tiff and I are very pleased to be with you this morning to discuss our October monetary policy report, which we published last week.
The global economy has slowed markedly, as several downside risks to the projection that we outlined in our July MPR have been realized. Volatility has increased, and there's been a generalized retrenchment from risk taking across financial markets.
The combination of ongoing deleveraging by banks and households, increased fiscal austerity, and declining confidence is expected to restrain growth across the advanced economies. The bank now expects that the euro area, where these dynamics are most acute, will experience a brief recession. The bank's base-case scenario, nonetheless, assumes that the euro area crisis will be contained, although this assumption is clearly subject to downside risk.
We welcome the agreement announced last week by euro area leaders on a comprehensive plan to address the ongoing challenges in Europe. We look forward to additional details on the modalities of the various measures announced, and to their implementation in the coming weeks.
In the United States, real GDP growth is expected be weak through the first half of 2012, reflecting diminished household confidence, tighter financial conditions and increased fiscal drag.
Growth in China and other emerging-market economies is projected to moderate to a more sustainable pace. These developments, combined with recent declines in commodity prices, are expected to dampen global inflationary pressures.
The outlook for the Canadian economy has weakened since July, with the significantly less-favourable external environment affecting Canada through financial, confidence and trade channels.
Although Canadian growth rebounded in the third quarter with the unwinding of temporary factors, underlying economic momentum has slowed and is expected to remain modest through the middle of 2012.
It is projected that household expenditures in Canada will grow relatively modestly, as lower commodity prices and heightened volatility in financial markets weigh on the incomes, wealth, and confidence of Canadian households.
Business fixed investment is still expected to grow solidly in response to very stimulative financial conditions and heightened competitive pressures, although it will be dampened by the weaker and more uncertain global economic environment. Net exports are expected to remain a source of weakness, owing to sluggish foreign demand and the ongoing competitiveness challenges, including the persistent strength of the Canadian dollar. Overall, the bank expects that growth in Canada will be slow through mid-2012 before picking up as the global economic environment improves, uncertainty dissipates, and confidence increases.
The weaker economic outlook implies greater and more persistent economic slack than previously anticipated. The Canadian economy is now expected to return to full capacity by the end of 2013. As a result, core inflation is expected to be slightly softer than previously expected, declining through 2012 before returning to 2% by the end of 2013.
The projection for total CPI inflation has also been revised down, reflecting the recent reversal of earlier sharp increases in world energy prices, as well as modestly weaker core inflation. Total CPI inflation is expected to trough around 1% by the middle of 2012 before rising with core inflation to the 2% target by the end of 2013, as excess supply in the economy is slowly absorbed.
There are several significant risks to the inflation outlook in Canada.
The three main upside risks relate to the possibility of stronger than expected inflationary pressures in the global economy, stronger momentum in Canadian household spending, and the possibility of a faster than expected rebound in business and consumer confidence, due to more decisive policy actions in the major advanced economies.
The three major downside risks relate to the sovereign debt and banking concerns in Europe, the increased probability of a recession in the U.S. economy, and the possibility that growth in household spending in Canada could be weaker than expected.
Reflecting all of these factors, last week the bank maintained the target for the overnight rate at 1%. With this target rate near historic lows and our financial system functioning well, there is considerable monetary policy stimulus in Canada. The bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and will set monetary policy consistent with achieving the 2% inflation target over the medium term.
Finally, permit me to say a word about an issue this committee recently raised, the renewal of the bank's inflation control agreement with the Government of Canada. This is central to the bank's mission, and we very much appreciate the committee's interest in it.
Since 1991, inflation targeting has proven its worth in both tranquil and turbulent times. Even so, we are always looking for ways to improve the framework. At the time of the last renewal, almost five years ago, the bank committed to continuing its research into potential improvements that might build on the success of the current framework. A concerted and ambitious research agenda focused on evaluating whether two specific changes--first, targeting a lower rate of inflation, or, second, targeting a path for the level of prices--could provide significant net benefits to the Canadian economy and Canadian households. Subsequently, the experience of the global financial and economic crisis prompted the bank to add a third item to its research agenda, asking to what extent monetary policy should take into account financial stability considerations.
Since 2008, we've had three major conferences for our staff and external researchers to present work on inflation targeting and the monetary policy framework and on these questions. The most important of these research papers have been published in three special issues of the Bank of Canada Review. Related studies by bank staff have been published as working papers, and as well, governing council members, including me, have spoken regularly and publicly about these issues.
We've been pleased to answer questions before this committee in the past on the progress to date towards renewing the inflation target, and Tiff and I would be happy to answer further questions on these issues today, as well as, of course, questions regarding the Canadian and global economies.
With that, Mr. Chair, I turn it back to you.