Speech by Deputy Governor Sharon Kozicki / Discours de la sous-gouverneure Sharon Kozicki

Thank you for the kind introduction, Bill, and thank you for inviting me to speak before you today. To start, I would like to acknowledge that the land we are meeting on is the traditional territory of many nations, including the Mississaugas of the Credit, the Anishinaabeg, the Chippewa, the Haudenosaunee, and the Wendat peoples. It is now home to many diverse First Nations, Inuit, and Métis. We also acknowledge that Toronto is covered by Treaty 13 with the Mississaugas of the Credit. We pay our respects to Indigenous peoples across the country and to their ancestors for their immeasurable contributions to this country. It's always a pleasure to be in Toronto—this is where I did my undergraduate and master's degrees just north of here at the University of Toronto, and I have fond memories of spending days in the Buttery and occasional trips to the Brunswick House and the Duke of York. But I digress. I really appreciate the opportunity to deliver the annual Laidler lecture in honor of David Laidler and his many contributions to economic thinking. He has left an indelible mark on North American and specifically Canadian monetary policy, and this legacy includes writing two award-winning books with Bill Robson. Speaking of which, I'm delighted to be here at the C.D. Howe Institute—the Institute has long been a resource for the Bank of Canada, thanks to its nationally acclaimed writing about economic policy. I've also enjoyed partnering with C.D. Howe on workshops to debate and research important economic issues. As you know, yesterday was one of the Bank's eight fixed interest rate announcement dates, so my talk here is timely. In yesterday's decision, Governing Council maintained the policy interest rate at 2.75%. Here's the context in which we took this decision: the trade conflict initiated by the United States remains the biggest headwind facing the Canadian economy, uncertainty remains high, the Canadian economy is softer but not sharply weaker, and we've seen some firmness in recent inflation data. These themes are broadly in line with what the Institute's Monetary Policy Council mentioned last week when it called on the Bank to cut its policy interest rate by 25 basis points. In taking yesterday's decision, we of course looked at traditional sources of data from Statistics Canada. The agency's reports on issues like inflation, jobs, and housing are critical to understanding recent economic conditions. But while those data give a good view of the forest, they're not necessarily providing a clear sightline to the trees, and we want to be able to see both. So today, I want to discuss how we're discovering new insights relevant for monetary policy, including our use of non-traditional data and surveys, as well as engaging in important outreach activities with Canadians. In the book 'To Kill a Mockingbird,' Atticus Finch says, 'You never really understand a person until you consider things from their point of view.' This is true. The conversations my colleagues and I have with both individuals and businesses help us see beyond the data and consider their points of view. As I said earlier, traditional macroeconomic data paint a high-level picture; they report on whole segments of the economy. Sometimes that means we don't see how economic conditions are affecting different households and businesses. Not only that, but traditional data tend to look backward—they measure what has already happened. They work best at helping us forecast and explain things we have previously experienced. The Bank's surveys and consultations with Canadians give us a snapshot of their spending and investment intentions. We learn more about their expectations for inflation and economic activity, and the results are crucial to our deliberations. When we expand the kinds of information we consider in our decisions, we gain a more complete view of how raising or lowering the policy rate affects consumers and businesses across the country. Simply put, this broader range of information helps us make better decisions. Just as importantly, connecting with Canadians helps us build trust and credibility with those we serve. When people have trust in the Bank as an institution, we see that they have our confidence and they see that we have their best interests top of mind. It creates an environment that supports the effective transmission of monetary policy. This is because when Canadians expect that we will follow through on our commitments, it greases the wheels for our actions to have their intended effects—and that, of course, is to achieve price stability, which in the long term promotes the economic and financial welfare of our country and its citizens.

Now I'd like to dive into some specific ways the Bank has broadened its sources of information over the years. I'll start with why we use some non-traditional sources of data. Our experiences during the COVID-19 pandemic provide a good example. Before the pandemic, we certainly didn't have data or models to grapple with a worldwide health crisis that would cost lives and livelihoods. Then, in March 2020, economies around the world came to a grinding halt, and the situation was evolving very quickly. Let's consider just what was happening with travel and dining out: demand for services like restaurants, flights, and hotels was first to fall off. Statistics Canada provides monthly data on sales at bars and restaurants that are helpful in normal times, but at the start of the pandemic, the backward-looking figures didn't reflect the rapidly deteriorating situation. So the Bank turned to more frequently published data, such as restaurant reservations, flight bookings, and credit card transactions, to assess consumers' real-time spending patterns. Another useful source of non-traditional data in the spring of 2020 were job postings from websites like Indeed. These data showed us the demand for new workers by firms across the country and nicely complemented data from Statistics Canada's Labour Force Survey. The LFS told us what had happened with employment in the previous month, while the more real-time data gave us a glimpse of what businesses expected in terms of their future hiring. Today, in the face of the global trade conflict, we've continued to use and even expand our reliance on non-traditional data. For instance, we're looking at different metrics to roll out our analysis of tariff implications, including the number of trucks crossing the border and the volume of ships entering and leaving ports in both Canada and the United States. It will surprise no one to learn that the numbers aren't encouraging. As one example, the number of trucks crossing the border both to and from the U.S. dropped sharply in April. This type of information is invaluable in times of great economic uncertainty, like we're in today.

Now on to another important tool: surveys. Like other central banks, the Bank conducts a number of surveys with the financial sector, and these results provide us with information on important issues like lending conditions, as well as the demand for and supply of credit. We also gain important insights on risks and resiliency in the financial system, and we talk to financial market professionals to hear their views on where the economy and inflation are headed. Today, though, in talking about surveys, I want to focus more on how our regional offices inform our monetary policy deliberations by reaching out to households and businesses. Since the late 1990s, the Bank has been expanding its reach into the diverse regions that make up this great country. This work has included opening regional offices and surveying businesses and consumers about their economic views. Our regional staff are well positioned to strengthen our ties with key local stakeholders such as industry, government, educational institutions, and community organizations. Currently, the Bank's regional offices conduct three key macroeconomic surveys: the Business Outlook Survey, the Business Leaders' Pulse, and the Canadian Survey of Consumer Expectations. I'll go over each one in greater detail in a moment, but overall, surveys like these accomplish three main goals. First, they help inform our outlooks for the economy and inflation. We hear from individuals and businesses about how they're feeling, measure their current levels of confidence, and ask what they expect to happen to prices and their own spending in the future. This gives the Bank forward-looking views on economic activity, demand, capacity pressures, and inflation, making surveys particularly helpful in providing early indications of how the economy is reacting during times of great uncertainty, like the current trade conflict. Surveys also shine a light on trends that may be simmering beneath the surface; they help us understand behavioral changes that don't always show up in aggregated data reports, at least not immediately. Finally, these surveys help us gather a wide range of views on how current economic conditions are playing out in communities across Canada. Our national economy is made up of diverse regional economies. Economic conditions may differ across regions, and regions may respond differently to broad-based upswings and downturns. Survey data gives us a clearer view of the differences in how households and businesses are experiencing the economy and how this may differ across regions.

Let me now turn to each of the surveys. The Business Outlook Survey, or BOS for short, is a quarterly survey of businesses across the country. It has existed since 1997, which provides us with a rich, long dataset for comparisons. Staff in our regional offices meet with local business leaders to discuss their views on the economy. We ask about their expectations for sales and demand, as well as their investment intentions. We probe their views about labour shortages, hiring, and wages, and we ask for their outlooks on costs, pricing, and economy-wide inflation. This gives us a broad view of perspectives on how businesses view the economy. For example, the results of the BOS for the fourth quarter of 2021 helped us better understand how the COVID-19 pandemic was affecting firms. For the first time since the start of the pandemic, we saw that businesses were planning to pass along cost increases stemming from supply chain pressures. They had concluded that customers understood these pressures and were willing to accept price increases. More recently, firms told us that uncertainty about tariffs has been affecting them in multiple ways, including weaker demand from their business customers that would be directly affected by tariffs.

Now on to the Business Leaders' Pulse, or BLP for short. This is our newest survey, created in 2021. It's a short monthly online questionnaire to assess firms' expectations for growth in sales and employment. It also asks about perceived risks to their business outlooks and poses other topical questions. The BLP provides a flexible and nimble pulse of evolving situations. It complements the BOS with timely feedback from firms about the effects of rapid changes in the economy. The BLP has been very helpful in monitoring effects from the situation south of the border. For example, businesses were reporting an increase in both uncertainty and inflation expectations as early as November 2024. In December last year, we also began noting a decline in business sentiment, even before the new U.S. administration was sworn in. This downward trend continued through the first quarter. Firms have reported that they are delaying or entirely cutting their plans to invest and hire. Sales expectations among exporters have also fallen considerably in recent months.

The final survey I'd like to highlight is the Canadian Survey of Consumer Expectations, or CSCE. This is a quarterly survey that measures households' views about their job prospects and financial health, as well as their expectations for inflation. We also ask about current issues of interest to the Bank. The results are parsed out by characteristics like age, geography, income, and education. During and immediately after the pandemic, the CSCE was helpful in giving the Bank a clearer look at differences in spending and saving patterns across households. The pandemic and subsequent increases in inflation and interest rates affected different segments of the population very differently. I spoke about this at the University of Regina in September 2023, a speech I encourage you to read. More recently, in the first quarter of 2025, results from the CSCE highlighted an emerging 'Buy Canadian' movement that could reduce Canadian imports from the United States. The CSCE has also allowed us to see how trade tensions with the United States are having a more pronounced impact on some Canadians. People working in sectors that rely on exports to the U.S. are increasingly concerned about their job security. They say they're more likely to reduce spending on durables such as furniture and appliances, and on non-essentials such as restaurant meals and vacations. Tariff policies could impact the prices consumers face. Indeed, with all the talk about tariffs, consumers' inflation expectations over the next year or two have recently increased.

I'll turn now to consultations that fall outside of the Bank's normal survey schedule and that are driven largely by pressing issues of the day. For many years now, the Governor and other senior Bank officials have met regularly with leaders in different sectors. Most recently, members of Governing Council spoke with representatives from the auto sector as well as other manufacturers and exporters. We wanted to hear firsthand how the trade conflict is affecting businesses in these sectors today and their outlook for the future. The Bank is also holding special consultations across the country to supplement traditional data sets and our standard surveys. As an example, I'll take you back to the interest rate decision in March of this year. We were operating in an environment that was truly chaotic. Governing Council wanted to know more about how the economy was being affected by uncertainty around both U.S. trade policy and Canadian countermeasures. We relied heavily on the results of our three standard surveys to inform our interest rate decision, and we supplemented these results with additional information from businesses and industry associations that were particularly affected by trade tensions. This would not have been possible without the strong relationships our regional staff have developed and nurtured over the years. We've also considered information coming in from such consultations for yesterday's decision. I'll give you a glimpse of what we heard: overall, firms believe that their worst-case tariff scenarios were much less likely to materialize than they reported earlier this year. While uncertainty remains high, there was less talk of catastrophic outcomes. But firms have now started seeing concrete impacts on their performance, and they're finding it challenging to formulate their outlooks. Most businesses expect activity to weaken in the near term, which puts jobs at risk. In addition, firms spoke about their costs increasing, which likely means they'll need to raise prices at some point. Governing Council considered this information with other data and analysis in deciding yesterday to keep our policy interest rate at 2.75%.

For my final example, I'd like to talk about an initiative that is near and dear to my heart. Members of Governing Council have ramped up the number of regional visits we make to hear firsthand about local economic conditions in communities across the country. We're asking a lot of questions and listening to people's views and expectations. Sometimes these regional meetings take place when a member of Governing Council is in a community for a public speech; other times, we'll make a trip solely to meet with community members and local firms. Last year, my colleagues and I embarked on 16 community visits, with a combined total of about 100 roundtables, bilateral meetings, and consultations. In addition to businesses, we meet with a diverse range of individuals and groups across the country, including Indigenous peoples, labour unions, public officials, business improvement associations, and organizations that provide social services, to just name a few. While I'm in Toronto, I'll be meeting with representatives from academia, a labour union, and a shipping and transportation company. I'll also be speaking with the head of a mentorship program for tech startups and a lead in biomedical engineering. People I've met with across the country have left an indelible mark on my perspective as a member of Governing Council. Hearing firsthand from people and businesses gives me greater clarity on the depth and breadth of economic issues. Speaking face-to-face with people turns facts and figures into a more complete narrative of how the economy is evolving. I've also heard things in my travels that foreshadowed what appeared later in hard data sets. For instance, when I was in Moncton earlier this year, firms told me that shipments to the United States were happening sooner than originally planned. They also reported an uptick in bringing shipments to Canada. This pointed to exporters and importers pulling forward shipments and building inventories ahead of tariffs, and this did show up later in the data. These insights also help the Bank grasp real-world issues that stretch beyond traditional data. When I met with representatives from Ottawa's information technology sector, I heard that the high cost of housing is making it difficult for firms to attract new employees from out of town. Affordability also came up in my conversations with people working in social services; they spoke about seeing increases in the number of people using food banks and experiencing homelessness. Another benefit of doing outreach is that it allows you to connect the dots. If I hear something in the Fraser Valley and again here in Toronto, this may be a sign of an emerging national trend that's worth keeping an eye on. But I want to stress that it's not just Governing Council members like me who are out collecting these insights. Our regional staff make important connections with individuals and businesses every day. They deserve huge kudos for their efforts in communities across the country. In fact, our Toronto regional office staff are joining us today so I can thank them in person.

So what we hear really does help us understand how developments like pervasive trade uncertainty affect the economy. If the Bank asks your organization to participate in a survey or an outreach activity, I encourage you to do so. We're grateful to those who are willing to take time out of their busy schedules to meet with us. I don't want to leave you with the impression that the benefits are one-sided. I certainly hope that those we meet with also come away from our conversations with a deeper understanding of how the Bank is working for them. We know the last few years have been difficult. Many households and businesses faced significant hardships. Inflation spiked higher than it had in decades, and the elevated interest rates needed to bring inflation back to the Bank's 2% target also made borrowing more expensive. In the end, the Bank's monetary policy actions restored price stability, and we've been able to lower our policy interest rate by two and a quarter percentage points since last spring. But Canadians once again face greater uncertainty about what the future will hold. It's important that people continue trusting us to be a steady hand in these turbulent times. Our outreach is an important part of earning and maintaining this trust. So it's time for me to wrap up now. Before I take your questions, I want to note that this year marks the Bank's 90th anniversary. For nine decades, we've promoted the economic and financial well-being of Canada and Canadians. We don't always get everything right, but we're constantly learning and adapting. This is vitally important in today's highly uncertain environment, when the situation sometimes feels like it's changing by the hour. As we navigate this uncertainty, my colleagues and I will continue reaching out to those we serve. When Governing Council is better informed, we make better decisions for you and for all your fellow Canadians. So thank you for taking the time today to hear more about our work at the Bank of Canada and how your insights shape our thinking. I look forward to answering any questions you may have.

Yeah, that's a really good question. Prior to COVID, the Bank of Canada and many central banks were able to focus a lot of their thinking on what we would call demand-side shocks, right? This is when people decide to spend more, and when people are spending more, it makes it easier for firms to raise prices. So you've got the quantity side and the price side moving in the same direction. In that world, raising interest rates makes it more costly to borrow, and you tend to see both demand fall off and inflation fall off. This is an easy world. The hard world is the world we saw in COVID—COVID wasn't just supply shocks, but there was some supply in there—and the world we're facing right now. The example from COVID is when all sorts of supply disruptions happened. Everybody read the stories about the ships that were all sitting off the L.A. port because they couldn't get in, supply chain disruptions because first this country would shut down, then that country. All of those things added to costs, right? Those were the sorts of things pushing up prices, but at the same time, overall demand was still pretty restrained. So it was a very challenging environment in thinking about monetary policy. The period where the supply shocks were emerging was not right when the pandemic hit; it was coming on more through the latter parts of 2021 and into 2022. That was a period where you were worried at first about tightening policy when demand was still soft but prices were starting to go up. That's a challenge we learned about, and we've talked about some of those challenges already in the past. We've reviewed our own policies through the COVID period, published our analyses of some of our early forecast errors, and we learned from that. This is another example of a supply shock, and this is an even bigger one. This is a world where the tariffs themselves are going to raise costs on Canadians, make Canadian firms less competitive, and mean they may have to lay off people. All of that is going to pull back on the Canadian economy, putting the brakes on and slowing things. At the same time, those tariffs are going to be adding to costs. So we have the economy weakening and price pressures going up. This is a huge challenge. We have one tool, a policy interest rate. It's hard to stimulate to bring back demand at the same time as you're straining to pull down prices—you can't do that. That's why, if you notice in terms of what I was talking about earlier, we are trying to weigh how any weakness coming through the Canadian economy might feed through to inflation and weigh down inflation at the same time as some of the costs associated with tariffs might start pushing it up. So we've been trying to weigh both sides of things. We are in a situation where we came into this world of tariffs already having lowered the interest rate quite a bit into what we call our neutral range, with inflation already at 2%. We weren't fighting the old battle. In that sense, we have to be very cautious. That's part of the reason, with all the uncertainty, we talk about not being quite as forward-looking, because it's very uncertain what's going to happen. But we are trying to continue to weigh whether we think there's going to be more of a tilt toward contained inflationary pressures while the economy is a lot softer. If that's a world we find ourselves in, then we're more likely to be lowering the interest rate. So we're constantly looking at these trade-offs.

I always think of that as more of something that becomes very relevant as we're looking forward in time, once you've gotten through the shocks. In that sort of world, when you have an interest rate that's way below where inflation is, it's being pretty stimulative, and that's a negative real interest rate world. When you have an interest rate way above where inflation is, you have elevated real interest rates, and that tends to be something that really holds back the economy a lot. On a day-by-day, month-by-month, or meeting-by-meeting basis, I find it a little awkward to look at the real interest rate because we're still working through so much stuff that started based on the past. But I do use it as a guide of where we are now. To give that example, when our interest rate was up at 5% at this time last year and we started getting signs that inflation was coming down—we had inflation down at 2% by September, and we started easing in June—five is quite a bit higher than two, and the economy was slowing. So it was a good opportunity to be lowering rates away from those extreme views. Things that I find at times a little more difficult are research economists like providing point estimates on things—those are a little harder to deal with because they're always going to be so highly uncertain. Once you're in a world where you're sort of close to neutral, which, if inflation is 2%, then we've been talking about neutral publicly as in a range around 2.75%, that implies inflation of 2% and a real of 75 basis points. But you don't want to anchor it on that 75—you want to be thinking more generally. We have talked about being closer to neutral right now. Again, as the starting point for this trade situation, having a policy rate that's in our range of neutral is a better starting point.

Yes, I mentioned in passing that we do have various means of doing outreach into the financial system, and then we also have data on some areas within the financial system. We don't have full transparency on everything that's going on within every institution out there. One of the issues right now that's very topical from a macro point of view is whether there are risks in the housing sector as a result of what's happening right now. We talked about this in our recent Financial System Review, now our Financial Stability Report. We spoke about this recently, where we've shifted from people having to reset their mortgage rates onto higher levels being a big downside risk to that no longer being as big a concern as a situation where unemployment could tick up, putting more households into difficult positions to meet their mortgage payments. That's an example of an issue we collect a lot of information on, not necessarily through our surveys. There's data you can look at in terms of arrears rates on different types of debt for different households, and things have been going up, so it's something to keep in mind. Other aspects in the non-bank financial institutions that you talk about are areas that our Financial Markets Department and Financial Stability Department are monitoring closely. The financial system is really evolving over time. Just as one example, hedge fund activity in Canada has grown a lot in the past number of years, so the question is what that means and how we think about it. The latest snapshot that we have publicly on all those insights is our Financial Stability Review that came out quite recently, in May. But we will continue to monitor and see if there are other ways we can get insights into the risks associated with different sectors—the household sector, business sector, non-bank financial intermediaries, and the banks themselves.

I think I can give you a concrete example, though it's stepping back about a decade. The example was the dramatic decline in oil prices that started in 2014 and continued into 2015. We knew this was going to be really hard for oil-producing regions in Canada, especially Alberta. But when you're setting monetary policy and trying to achieve that inflation objective, you have to address the issue of setting policy for a country when national data may be moved around by a region, but then the follow-up question is whether it's just that region. In 2015, there was a big decline anticipated in investment in the oil industry in Canada. We surprised markets and eased in January 2015. That was because when we started doing our analysis, we recognized that the ramifications were going to be large—there were going to be spillovers. We did some analysis for the macroeconomy to talk about how this was really not just an industry issue but a national issue in January. We followed that up in April by looking at it more from a regional point of view, and in that regional analysis, you could see that manufacturing in Ontario was going to be very hard hit by reductions of investment in Alberta. As soon as I say that, it's obvious to everyone, but when people immediately think about oil prices moving, they often think in a much more contained basis. If things had been more contained, maybe there would have been a different decision. In that point of view, we had to really dig in to understand if this was a big enough shock to be a national shock, and yes it was.

That's a very fundamental set of questions. I'm going to start off by doing our standard—we didn't say a single thing in April. We had two illustrative scenarios because we were really not able to narrow down what we thought was a reasonable middle ground on where tariffs would be. We're a small open economy; trade really matters a lot for our economy. That lack of confidence in our ability to put down a realistic assumption and even make a conditional single forecast based on assumptions—we just didn't think that was a reasonable thing to do. Why did I go back to April? If you look back in our April Monetary Policy Report, there are two sets of tables. When you look through those two sets, you see really different outcomes in terms of the economic output of the country and GDP. But there are also implications for what potential output might be. It's very, very difficult to nail down the implications for potential output of different levels and persistence of trade policies. There are some models out there that can tell you if you start in this world and then have these major permanent trade policies, what your new world looks like later. But how you get from where you start to where you end under those very extreme assumptions of knowing what's going to happen is highly uncertain. That's one of the reasons why I'm reluctant to talk about what the output gap is even today. We're between forecasts, so we had this awkwardness because we only had these illustrative scenarios in April. We'll be putting something together for January. As the Senior Deputy Governor said yesterday, we hope we can put together more of a central scenario as opposed to having multiple. We're hoping—we'll see what happens. But even that is going to be highly conditional. At that time, we will give more insights on where we think things are in terms of the output gap. I'm going to turn things around a little, though. 6.9% unemployment—that's high. That tells me that we are currently in a position of excess supply in the economy. I can't give you a point estimate, and I'm certainly not willing to put something on an unobserved idea like what is the natural rate of unemployment. But I can tell you that to me, 6.9 is high, and we have excess supply. If we have a bad outcome, we'll probably get more excess supply. Even with two scenarios, you still only need to have one overnight rate target. It's tough.

Yes, there were a lot of things moving around in that period. One simple example: you didn't get drastically different behavior in shelter prices versus a lot of other services prices in past business cycles—they'd sort of move along together. You did during COVID. Suddenly you had strong demand for goods because everyone was locked up at home and buying gym equipment for their house. So there was pretty solid demand for goods, and it was really strong in other countries. With trade disruptions, a lot of demand for goods and prices going up. Meanwhile, services prices were sort of sluggish. Things really started moving in different directions. A few things: First, we started getting micro data from Statistics Canada. With item-by-item level price data, we could more cleanly assess whether prices were changed more frequently or changed by more when they did change. That matters in terms of how we interpret what's happening and what our models would say for the future. Having that data, we learned that it was the frequency changing, not so much that the price increases were larger when they changed. That was a really interesting thing we could not get out of the aggregate data. Personally, I like to look at the big components in CPI—food inflation, energy, goods excluding food and energy, services excluding shelter, and shelter—and understand what's going on in each of those. I feel that's enough decomposition to develop a better understanding of whether things are broad-based or there's a special story. That's a lot more detail than we used to have, and it also links up better with some of the anecdotes. When we talk to firms, we're not talking about an aggregate view; their stories help us understand the pieces. So by looking at that sort of information, we are in a better spot to pull the pieces together. Lessons learned.

First, where are we now? We did quantitative easing and quantitative tightening. There have been a couple of really good speeches by my colleague Toni Gravelle on that—I'd encourage people to look on the website. We basically say there's some weird stuff that goes on month to month, and some smoothing needs to happen, but we're basically done with the quantitative tightening cycle. We're right now at what we're estimating is about the right size on the balance sheet, so we're largely done. Is QE still a tool? It is a tool, but it's a tool with a very high bar, and it's a tool that we would not look to use before we've exhausted our overnight interest rate. I say that because that may not be the case in other countries. In our case, we see it as exceptional—a high bar to go in that direction. It is a tool, and we will continue to investigate various aspects of that tool, but it's for a different world than we're in right now.