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Monetary Policy

Decision-making process

Major briefing

About a week before the announcement, the Governing Council is briefed on four important topics:

Risks and alternatives

The staff projection is an outlook for the economy's most likely path. There is, of course, much uncertainty around this outlook, and the economic model is used to assess the main "risks" to it.

Examples of risks include different assumptions about the current amount of slack in the economy or the growth rate of economic capacity; different assessments of the prospects for the U.S. economy; and alternative views on the future path for the price of oil or other commodities. The staff's "risk analyses" assess the sensitivity of the baseline forecast to such risks and provide the Governing Council with a range of forecasts and policy recommendations.

The staff also consider alternative policy scenarios; for example, one in which interest rates are held constant for a period of time. This would indicate the consequences of delaying the interest rate response proposed by the model.

As well, staff review various indicators of capacity pressures and inflation.

Regional survey and forecast

Information on economic activity gathered from industry contacts across the country provides a very different lens through which to view the economy.

Four times a year, regional representatives visit about 100 companies. They ask a set of standard questions on past and expected future sales growth, investment intentions, inventories, employment plans, wage growth, and prices.

The survey is small, but it is designed to reflect the diversity of the Canadian economy by region, by type of activity, and by firm size. The information gathered gives the Council insight into what business people are seeing and planning. Based on the survey and other factors, regional staff forecast the growth in each region of the country for the current and next year. These are then aggregated to produce a national forecast that can be compared with the staff economic projection.

View the survey.

Review of indicators of inflation and capacity pressures

This review includes indicators of activity and capacity in the goods, labour, and real estate markets, as well as various measures of wage and price inflation, and measures of inflation expectations.

Money and credit

The economic model used in the staff projection focuses on the links from interest rates to spending by households and firms. Information on various holdings of money and credit provide another view of what consumers and firms are doing and planning to do.

The challenge for the staff is to separate the genuine signals about economic activity and inflation from volatility caused by other factors. Regular contact with financial institutions provides useful insight into developments that appear to be affecting the growth of money and credit. Information is also obtained on credit spreads in bond markets and on any changes in the conditions under which banks are lending to businesses and households.

The staff in the Bank's Department of Monetary and Financial Analysis assemble this information to provide an overall view from the financial side of the economy on the outlook for output growth and inflation, as well as on the risks surrounding this outlook. They then make a recommendation to the Governing Council on the appropriate level for the key policy rate.

Financial market expectations

The Financial Markets Department assesses market expectations for interest rates; in particular, what the markets expect the Bank to do with the key policy rate, and what the U.S. Federal Reserve is expected to do at their next few meetings.

This assessment is based on interest rate futures and expectations implicit in the term structure of interest rates, as well as on market commentary, the published reports of investment banks, and the Bank's contact with dealers and investors. The discussion highlights what the market is expecting and what factors participants are focusing on. The market perspective acts both as a reference point against which to compare the staff's analysis and as a guide to the issues that may need to be addressed when communicating the decision.

Next: Final briefing and recommendations