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The financial system makes an important contribution to the welfare of all Canadians. The ability of households and firms to confidently hold and transfer financial assets is one of the fundamental building blocks of the Canadian economy.

Global economic growth has been somewhat stronger than projected, with momentum in emerging-market economies increasing noticeably.

Deputy Governor Lynn Patterson discusses the efforts in multiple jurisdictions to strengthen LIBOR and similar benchmarks and work underway in Canada to consider a new risk-free benchmark for the Canadian dollar market.

The financial system makes an important contribution to the welfare of all Canadians. The ability of households and firms to confidently hold and transfer financial assets is one of the fundamental building blocks of the Canadian economy.

Staff projections provided for the Bank of Canada's monetary policy decision process take into account the integration of Canada's very open economy within the global economy, as well as its close real and financial linkages with the United States. To provide inputs for this projection, the Bank has developed several models, including MUSE, NEUQ (the New European Quarterly Model), and BoC-GEM (Bank of Canada Global Economy Model), to analyze and forecast economic developments in the rest of the world. The authors focus on MUSE, the model currently used to describe interaction among the principal U.S. economic variables, including gross domestic product, inflation, interest rates, and the exchange rate. Brief descriptions are also provided of NEUQ and BoC-GEM.

Deputy Governor Lynn Patterson discusses how the Bank gathers financial market intelligence and what it is learning.

Monetary policy is working to reduce inflationary pressures and inflation is coming down, although it will take more time to see if this progress proves durable. The Bank projects that inflation will stay around 3% into the second quarter of 2024, ease below 2.5% in the second half of the year and return to target in 2025.

It's great to be back in Vancouver and to renew acquaintances at the Board of Trade. I'm going to spend some time today discussing the Bank of Canada's outlook for the Canadian economy and inflation, and how we are responding. But in order to understand the current economic situation, we need to look at some of the extraordinary events of the past year or so and how those events have affected the economy.

Economic growth in Canada has been weak but is set to pick up. Headline inflation has risen above 3%. If oil prices and gasoline refinery margins decline as assumed, inflation should ease in the coming months. Inflation excluding gasoline remains near 2%.

The turmoil in global financial markets entered a new phase in September, moving to a more acute and broad-based loss of confidence in the context of a series of failures and near-failures of large financial institutions in the United States and Europe.

FSR Highlights - December 2008