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Responses to the autumn survey indicate that the combination of weak U.S. demand, volatile financial markets, and slowing momentum in the West are weighing more heavily on business activity in Canada.

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Leonard C. Wyon: Canada’s Victorian Engraver

Photography by Gord Carter

Three major developments are affecting the Canadian economy: the protracted weakness in the U.S. economy; ongoing turbulence in global financial markets; and sharp increases in the prices of certain commodities — particularly energy. The first two developments are evolving roughly in line with expectations outlined in the April Monetary Policy Report.

Despite the recent slowdown in real economic growth in Canada, the results of the summer survey do not suggest widespread weakness across Canadian firms. Firms have, however, become increasingly concerned about pressures on input costs and inflation.

In this article, we consider central bank intervention to address financial market turmoil with a focus on the questions of why, when, and how a central bank might intervene. We set out a policy framework and identify appropriate central bank instruments to respond to extraordinary financial market turmoil, consistent with central bank policy goals and functions.