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Quarterly Financial Report - First Quarter 2017 - For the period ended 31 March 2017

In 2005, the Bank of Canada celebrated its 70th anniversary. Since the Bank opened its doors in March 1935, it has evolved into a national institution at the heart of Canada’s economy. We had a lot to celebrate in 2005—particularly our progress over the past 70 yearsand our continuing contribution to the economic and financial well-being of Canadians.

Canadian economic activity remains strong, and employment is robust. The Bank is forecasting growth of about 4¼% in 2022, easing to 3¼% in 2023.

The Governing Council judges that the risks to the Canadian financial system have decreased somewhat relative to the December FSR, but that the overall level of risk remains high. The key risks are similar to those highlighted in December, and emanate primarily from the external environment.

We present a two-country model featuring risky lending and cross-border interbank market frictions.

Interest rates are working to moderate spending and inflation is easing gradually, though underlying pressures are proving persistent. The Bank projects that inflation will stay around 3% through the first half of 2024, returning to target in 2025.

The year 2007 was marked by sharply increased volatility in financial and foreign exchange markets, and a widening of credit spreads. Despite financial market turbulence, the Canadian economy continued to expand, and inflation remained close to our target of 2 per cent. In this, my final Annual Report message, I begin by reviewing the economic and financial developments and challenges of the past year. I then highlight seven important ongoing challenges faced by Canada and the Bank during my seven years as Governor.

The premium on “on-the-run” Treasuries is an anomaly. I explain it using a model in which primary dealers hold inventories of Treasuries. I use the model to analyze the effects of granting access to central bank facilities.

This issue features a summary of the Bank’s annual conference, Financial Intermediation and Vulnerabilities, which took place in October 2012, as well as two articles that present analysis of international macroeconomic coordination since the global financial crisis and the U.S. recovery from the Great Recession.

In this issue, Bank researchers discuss the muted recovery from the 2007–09 financial crisis and possible causes. There are also discussions about the Bank’s new Canadian survey of household expectations, measuring both durable goods and housing prices in the CPI and how regulatory changes may affect monetary policy operating frameworks. In the final article, improvements to the management of Canada’s foreign exchange reserves are introduced.