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Households report distinctive views of the macroeconomy along partisan lines, while their expectations about personal finances do not follow the same pattern. Economic inequality remains the major contributor to polarized views of the macroeconomy. Partisan politics are simply a magnifier.

This issue of the Financial System Review reflects the Bank’s judgment that high household indebtedness and housing market imbalances remain the most important vulnerabilities. While these vulnerabilities remain elevated, policy measures continue to improve the resilience of the financial system. A third vulnerability highlighted in the FSR concerns cyber threats to an interconnected financial system.

Senior Deputy Governor Carolyn Rogers discusses how productivity growth can boost Canada’s prosperity and resilience. She also outlines how upcoming financial sector reforms are designed to increase competition.

Canada’s economy is projected to grow by 1.7 per cent in 2016 and return to potential next year as complex adjustments continue.

Deputy Governor Toni Gravelle discusses the commodity price shock and its implications for the Canadian economy and monetary policy.

This issue features three articles that present research and analysis by Bank of Canada staff. The first updates previous Bank estimates of measurement bias in the Canadian consumer price index; the second uses a new term-structure model to analyze the relationship between the short-term policy rate and long-term interest rates; and the third examines indicators of balance-sheet risks at financial institutions in Canada.

Two major issues dominate the analysis and policy discussion in this Monetary Policy Report: the nature and extent of the global economic slowdown that began late last year and the consequences of the terrorist attacks in the United States.

Real GDP in Canada is expected to grow by 2.0 per cent in 2018, 2.2 per cent in 2019 and 1.9 per cent in 2020.

This article examines the recent proposition that the decline in Canada's standard of living relative to that of the United States is causally related to the decline in our exchange rate. The authors explore the main channels through which the exchange rate and the standard of living could be related—productivity and the terms of trade—focusing mainly on productivity. They conclude that the decline in world commodity prices and weak demand for domestic output were affecting both Canada's standard of living and the exchange rate and that the flexible exchange rate regime itself did not play an independent role.

The three articles in this issue provide an overview of the monetary policy decision-making process at the Bank of Canada, a discussion of Bank research on the assessment of vulnerabilities in the financial system and a description of recent fragmentation in Canadian equity markets.