EC140 - 2025 - Class 18 - Bank of Canada - Copy

Page 7: Key Announcement Details

• Frequency: Every six weeks.

• Format includes:

  • Policy announcement

  • Overview of global economic conditions

  • Overview of Canadian economic conditions

  • Inflation measurement

  • Risks to the Canadian economy

  • Forward guidance (if applicable)

Risks to Monetary Policy

Page 8: Interest Rate Considerations

• Risks that might lead to higher interest rates than suggested by Taylor Rule:

  • A. Depreciation of the Canadian dollar.

  • B. Appreciation of the Canadian dollar.

  • C. Increase in input costs for businesses.

  • D. Decrease in incomes in the United States.

  • E. Decrease in investment spending in Canada.

Page 9: Response to US Economic Conditions

• Scenario: U.S. is facing recession and stagflation.

• Bank of Canada response options:

  • A. Lower interest rates.

  • B. Do nothing.

  • C. Raise interest rates.

Goals of the Bank of Canada

Page 10: Current Goals (as of 2021)

• Maintain Inflation: Target range between 1% and 3%.

• Maximize Employment: Aim for sustainable employment levels.

• Output Gap Management: Minimize or limit negative output gap.

Monetary Policy Tools

Page 11: Tools Overview

• Targeting the overnight rate:

• **Setting limits: **

  • Lower limit = Deposit rate

  • Upper limit = Bank rate

• Conditions impacting rates:

  • Zero lower bound impacts.

• Policies include:

  • Forward guidance

  • Quantitative easing/tightening

  • Buying/selling long-term bonds to influence interest rates.

Unconventional Monetary Policy

Page 12: Alternative Strategies

• Issue of zero lower bound: Challenge in implementing negative interest rates.

• Strategies for reducing rates:

  • Focus on longer-term bonds.

  • Forward guidance sets expectations influencing long-term bond rates.

  • Quantitative easing involves buying long-term bonds to lower rates.

  • Quantitative tightening involves selling to raise long-term rates.

Historical Context

Page 13: Actions in March 2020

• Bank aim: Lower interest rates heavily by reducing overnight rate to 0.25%.

• Engagement in:

  • B. Quantitative easing by buying longer-term bonds.

Lender of Last Resort Role

Page 14: Importance and Impacts

• Function: Provides loans to failing banks to prevent panics.

• Concerns: Can encourage riskier behavior.

• Regulations needed: To manage risks for major banks deemed "too big to fail."

Reporting Structure

Page 15: Monetary Policy Report

• Release frequency: Approximately every 3 months.

• Key elements:

  • Inflation control strategy summary

  • Global economy overview

  • Canadian economy overview

  • Risks to inflation outlook.

Recent Trends in Monetary Policy

Page 17: Timeline

• Early 2020: COVID impact leading to overnight rate drop.

• Late 2021 - Mid 2022: Rising inflation response by the Bank.

• Mid-2023 - Early 2024: Consideration of rate halts.

• Late 2024 - 2025: Response to international instability.

Taylor Rule Calculations Across Periods

Page 18: March 2020 Calculation

• Estimates:

  • Real neutral rate: 1%; inflation: 0%; output gap: -6%.

• **Calculate projected overnight rate.

Page 19: March 2022 Calculation

• Estimates:

  • Real neutral rate: 1%; inflation: 5%; output gap: +1%.

• Calculate projected overnight rate.

Page 20: July 2023 Calculation

• Estimates:

  • Real neutral rate: 1%; inflation: 4.4%; output gap: +2%.

• Calculate projected overnight rate.

Future Topics

Page 21: Upcoming Discussion

• Introduce AD/AS model for economic analysis.

• Focus on:

  • Short-run vs long-run implications of policies.

  • Impacts of fiscal policy decisions.