Bank of Canada Annual Report 2018 Annual Report ANNUAL REPORT DYNAMIC. ENGAGED. 2018TRUSTED. Rapport annuel 2018 de la Banque du Canada The Annual Report is available on the Bank of Canada’s website at bankofcanada.ca. For further information, contact: Public Information Offi ce Communications Department Bank of Canada 234 Wellington Street Ottawa, Ontario K1A 0G9 Telephone: 1-800-303-1282 (toll-free in North America) Email: [email protected] Website: bankofcanada.ca ISSN 1914-5691 (Print) ISSN 1487-0452 (Online) © Bank of Canada 2019 ANNUAL REPORT DYNAMIC. ENGAGED. 2018TRUSTED. Contents Governor’s Foreword . 1 2018 at a Glance . 4 Management Discussion and Analysis . 7 Mandate and Planning Framework . 9 Monetary Policy . 15 Financial System . 21 Funds Management . 27 Currency . 33 Managing the Bank . 37 Communications and Outreach . 43 Global Engagement . 49 Governance of the Bank . 55 Risk Management . .63 2018 Financial Results . 69 Financial Statements . 81 Senior Deputy Governor Carolyn A. Wilkins and Governor Stephen S. Poloz on their way to the Monetary Policy Report press conference following the October rate announcement GOVERNOR’S FOREWORD Building on our accomplishments 2018 began with the Bank of Canada being named “Central Bank of the Year” by UK-based Central Banking, which closely follows developments in the world’s central banks. This was a very proud moment for us—the sense of accomplishment, widely shared, was palpable. The Canadian economy, too, seemed to be at the top of its game. Inflation was very close to the 2 per cent target, the economy was operating near its potential, and unemployment was at a 40-year low. Yet there remained much to be done. The Bank needed to bear down to meet the commitments in the final year of its three-year plan and to develop a new medium- term plan for 2019–21. Interest rates were expected to move up toward a normal range consistent with how considerably. The Bank maintained a middle course the rest of the economy was performing. In short, the throughout, pointing to both upside and downside organization sought to build on the accomplishments risks to the economy. In the end, a new agreement was of 2017, and this important work needed to happen in a signed—the Canada-United States-Mexico Agreement chaotic global context. (CUSMA)—and a strong sense of relief spread through In the Canadian economy, companies were telling us corporate Canada. Of course, ratification challenges that they were operating at capacity, facing a shortage remain, and the ongoing US-led trade conflict—aimed of qualified workers to fuel their growth and hesitating to mostly at China, but also involving tariffs against many invest because of trade uncertainty. It is a testament to other countries—continues to raise substantive doubts the resilience of the economy that it continued to grow about the outlook for the global economy. Once again, in these conditions. We estimate that it grew by about the Bank continued to emphasize that the risks are two- 2 per cent in 2018, with 1.3 per cent growth in job cre- sided, as there would be substantial new economic lift if ation, although the fourth quarter saw an abrupt slowing the trade war were resolved. as a result of a new collapse in global oil prices. Through the ebb and flow of economic and geopolitical Concerns about the future of the North American Free events, the Bank raised interest rates three times during Trade Agreement (NAFTA) reached a peak during the 2018—in January, July and October—bringing the summer and caused investment spending to weaken policy rate to 1.75 per cent. The drop in global oil prices Governor’S Foreword 2 BANK OF CANADA • ANNUAL REPORt • 2018 late in the year felt like an echo of late 2014, although weigh alternative risks and policy scenarios. The Bank’s the situation is clearly less dire this time because the forecast record was very strong in 2018, especially oil price drop has been smaller and the economy is given the volatility we faced. We also conducted timely, stronger overall. Governing Council continues to judge innovative research into the effects of escalating trade that the policy interest rate will need to rise over time actions on the world economy. into a neutral range to achieve the inflation target. The A key challenge that central bankers everywhere face appropriate pace of rate increases will depend on how is formalizing the process of considering financial the outlook evolves, with a particular focus on develop- stability risks when conducting monetary policy. We ments in oil markets, the Canadian housing market and made some significant improvements in 2018 on this global trade policy. front, from three different directions. First, we upgraded our core forecasting model to incorporate household debt accumulation and the link with higher house prices. Second, we deployed growth-at-risk modelling to capture the evolution of financial vulnerabilities and “Overall, we ended 2018 with their potential consequences for economic growth should those risks be realized in a negative scenario. most of the Canadian economy And third, we began to use anonymized microdata on on a solid footing... And we start mortgages—at the individual loan level—to help us understand the consequences of higher interest rates 2019 with more confidence that on household cash flows. Another challenge shared with other central banks is the financial system vulnerabilities digitalization revolution. We have reorganized ourselves have stopped building and, in to invest more in understanding how digitalization is affecting our economy, particularly in investment and some respects, are improving.” productivity growth. We stepped up our work examining the potential features of a central bank digital currency, their implications and the circumstances under which we could recommend issuing one. This work will help us make timely and informed decisions, should those Overall, we ended 2018 with most of the Canadian circumstances arise. And we reached new milestones economy on a solid footing. We expect investment in Project Jasper, establishing the Bank as a leader in spending and exports to pick up on the back of research on financial technologies. In fact, we were CUSMA, the Comprehensive Economic and Trade recognized for this by Central Banking with a Pioneer Agreement (CETA) and the Comprehensive and Award at the FinTech & RegTech Global Awards. Progressive Agreement for Trans-Pacific Partnership (CPTPP), as well as the federal government’s new accel- An important global forum for sharing work on such erated depreciation tax rules. We also expect a return issues is the G7, and Canada held the G7 Presidency in to more balanced growth that is less reliant on housing. 2018. We made important contributions to that process, And we start 2019 with more confidence that financial partnering with the Department of Finance Canada to system vulnerabilities have stopped building and, in co-host a series of events that helped lay the intellectual some respects, are improving. groundwork for policy discussions by central bank governors, finance ministers and, ultimately, the leaders A Christmas card I received from a fellow central bank at the G7 Summit in Charlevoix, Quebec. governor noted that we had “stickhandled some tricky situations” at the Bank of Canada in 2018, which felt There were many more highlights in 2018, many of like high praise to a Canadian. If we did, it was because which are far less visible to Canadians. We led the our staff nimbly adapted to some very unusual develop- creation of a working group with financial market par- ments. Monetary policy must manage the risks facing ticipants to enhance our benchmark interest rates. We the Canadian economy in a forward-looking manner, worked closely with Payments Canada, which operates given that changes in policy take time to affect the Canada’s core large-value and retail payment systems, economy. The hockey metaphor is very apt because the to modernize those systems. We announced a partner- puck must be passed to where the receiving player will ship with the Creative Destruction Lab and launched be when it arrives. This means that policy depends very the Partnerships in Innovation and Technology Program heavily on economic forecasts and models designed to to encourage the deployment of new digital tools and Governor’S Foreword BANK OF CANADA • ANNUAL REPORt • 2018 3 technologies at the Bank. And we made significant enhancements to the resilience of our systems and operations in our existing facilities and established a new, fully capable backup operations centre in Calgary. Much more visible to the public was the introduction of a new $10 bank note. This was the culmination of nearly five years of effort that required not only a dedicated and innovative team at the Bank but also the support of the Minister of Finance and the federal government. The note is the first regularly circulating bank note to feature an iconic Canadian woman. It is also Canada’s first vertical note, which permits the image of the fea- tured individual to be some 50 per cent larger. After an unprecedented campaign to involve Canadians in the choice, civil rights pioneer and businesswoman Viola Desmond, from Halifax, was selected. Keeping with the theme of human rights, we chose to feature Winnipeg’s Canadian Museum for Human Rights on the obverse side. A second high-visibility area that changed significantly in 2018 was on the Bank’s communications front. We have always strived to be clear and open with Canadians. But in 2018 we undertook a major survey of stakeholders and conducted a formal analysis of Governor Stephen Poloz takes part in the November launch event for our main communications channels for readability. We the new $10 bank note featuring Viola Desmond.