FULL TEXT-Speech by Bank of Canada’s Lane

WINNIPEG, Manitoba, June 22 (BestGrowthStock) – Following is the
full text of a speech given by Bank of Canada Deputy Governor
Tim Lane in Winnipeg:

Good afternoon. It’s a pleasure to be here.

The recent past has underscored the fact that, in finance
and the economy, most things are interconnected on a global
scale. Throughout its history, Canada has been powerfully
affected by events elsewhere. Manitobans in particular are well
aware of this reality. Waves of immigration, rapid changes in
commodity prices, the Great Depression, two World Wars, and
technological advances – all have had an enormous impact here.
More recently, the global financial crisis has been a stark
reminder that everyone – even citizens in countries with sound
“fundamentals” – is affected by major shocks, regardless of
where those shocks originate.

Global realities and their impact on the domestic financial
system inform much of the Bank of Canada’s most recent issue of
its Financial System Review (FSR), which was published
yesterday. In the FSR, the Bank identifies and evaluates risks
and vulnerabilities in the financial system. Our goal in doing
this is to contribute to the long-term resiliency of the
Canadian financial system by promoting informed discussion of
various relevant issues and developments.

In my remarks today, I’d like to discuss two issues that
are discussed in the FSR, which, directly or indirectly, pose
risks to financial stability. These issues are sovereign debt
and global macroeconomic imbalances. Both are “global” issues,
but they will have to be managed at the national, as well as
the international, level. As such, they are at the core of
ongoing G-20 discussions, including those taking place this
week in Toronto.

I’ll start by taking a very brief look at the Canadian
economy – where we are now, and where we appear to be headed.
Then, I’ll elaborate on the two issues I’ve identified. I’ll
welcome comments and questions at the end.

The Canadian Economy

The global economic recovery is under way, but it is an
uneven one. In the emerging-market economies, growth has been
vigorous – indeed it has been stronger than we expected a few
months ago. At the same time, in most advanced economies, the
recovery has been subdued and heavily dependent on the
exceptional stimulus provided by monetary and fiscal policies.
In recent months, concerns over European sovereign debt have
dampened prospects for the recovery in Europe. So far, these
concerns have had limited effects on Canada – mainly, a modest
fall in commodity prices and some tightening of financial
conditions – but they are an important risk to the recovery.

In Canada, the economic recovery is proceeding somewhat
more rapidly than expected. Growth has been very strong in the
past two quarters, although we expect it to moderate, starting
this quarter. Several factors have been supporting the
recovery: fiscal and monetary stimulus, improved financial
conditions, the rebound in global economic growth, more
favourable terms of trade, and increased business and household
confidence. At the same time, the persistent strength of the
Canadian dollar, our poor relative productivity performance,
and the low absolute level of demand in the United States are
acting as a drag on the recovery. The Bank projects GDP growth
of 3.7 per cent in 2010, with a gradual slowing to 3.1 per cent
in 2011 and 1.9 per cent in 2012. Inflation is expected to
remain close to our 2 percent target through this period.

In view of this outlook, the Bank of Canada indicated in
late April that the need for extraordinary monetary policy
stimulus – which we had been providing since the beginning of
the financial crisis and through the recession – was passing.
On 1 June, we increased our policy interest rate from 1/4 of a
per cent to 1/2 of a per cent. Of course, that still leaves
interest rates at a very stimulative level. But because of the
uncertainties – particularly those emanating from Europe –
we’ve been careful to emphasize that the extent and timing of
any additional withdrawal of monetary stimulus would depend on
how the outlook for economic activity and inflation evolves. In
making those decisions, we will always stay focused on
achieving the 2 per cent inflation target.

In our monetary policy decisions, we are mindful of the
risks to the economic outlook, both on the upside and the
downside. In assessing financial stability, the downside risks
are our main focus. So let me turn now to a discussion of two
areas of risk that may bear on the health and stability of the
financial system, both here and abroad. First, I’ll look at the
issue of sovereign debt.

Sovereign Debt

Sovereign debt – and unsustainable fiscal deficits – have
been front and centre in recent global economic events.
Concerns about sovereign debt have flared up in recent months
in a number of European countries. But in the coming years,
many advanced countries will face major challenges in achieving
and maintaining sustainable fiscal positions. In Canada, we are
fortunate that this task will be more manageable than
elsewhere, and continued resolve is required.

The current sovereign debt problems were exacerbated and
brought to a head by the global financial crisis and recession.
Of course, a number of countries entered the crisis with weak
fiscal positions, but their situations have deteriorated
substantially. In part, this reflects the direct support many
governments provided to keep troubled financial institutions
afloat. Although the final bill for this support is not yet
known, it could be very large. Another important element is the
massive fiscal stimulus that governments in all major countries
delivered to mitigate the recession. And, of course, reduced
tax revenues, associated with the recession, have added
substantially to the problem.

Stock Investing

FULL TEXT-Speech by Bank of Canada’s Lane