Mr Thiessen's statement on the Bank of Canada's Monetary Policy Report  (Central Bank Articles and Speeches, 26 May 1999)
Central bank: boc | Type: speech | Date: 1999-05-26

## Mr Thiessen's statement on the Bank of Canada's Monetary Policy ReportOpening statement of the Governor of the Bank of Canada, Mr Gordon Thiessen, before Standing Committee on Finance of the House of Commons on 26 May 1999.It

is always a pleasure to appear before your Committee following the publicatio Monetary Policy Report.

We released our ninth Report last Wednesday.

The Bank of Ca began publishing these Reports on a semiannual basis four years ago, as part of our increase the transparency and accountability of the Bank's conduct of monetary policyThe main focus of every Monetary Policy Report is how well Canada is doing in mana inflation.

But controlling inflation is not an end in itself.

The objective of mone to help create and maintain a monetary climate that favours good economic performan economy where growth and employment are strong and Canadians feel prosperous.

The Ba feels strongly that the best thing that monetary policy can do to help long-term gr economy is to preserve low and stable inflation.

Indeed, I believe the low and stabl rate we have had in Canada in recent years has helped us through some difficult timesHowever, I am also happy to report that the global financial system is much more st it was at the time of my last appearance before you six months ago.

The shock f financial crisis in Southeast Asia, which began almost two years ago, was compound August by Russia's default on its external debt.

The turbulence that followed has no subsided and investor confidence is being restored.

As a result, the outlook for economy has become more positive than it was last November.Financial markets have steadied in Southeast Asia, and prospects are good for a recovery there.

In Brazil the authorities have taken major steps to address their Overall, global financial markets now seem better able to assess risk.

Interest r central banks in all major countries have helped restore investor confidence.Most importantly for Canada, the US economy has continued to outperform expectations strong growth and, as yet, no definitive sign of inflation pressure.

Nonetheless, t fair degree of uncertainty about the overall external environment, given the performance of the major economies.

Japan is still in recession and Europe has been down.

Because of this, we are expecting only a slow recovery in world commodity pric year.In Canada, the recent driving force in our economy has been exports.

The strong de the US economy, the relatively weak Canadian dollar and increasingly competitive Ca manufacturers are allowing us to sell into the United States very successfully.What we are expecting to see now, however, is an increase here at home in consume business spending.

We believe that the improvement in business and consumer confi that we have seen in the last few months, the better employment picture and recent r in interest rates will all help support domestic spending.To be more specific, compared with six months ago, we at the Bank have raised projection for growth in the economy in 1999 to between 2¾ and 3¾ per cent.

We have s wide range because of the international uncertainties that I mentioned a moment ago. end of this range is well above the latest consensus among private sector forecasteconomy does grow at the higher end of this range, it is likely to be because of str exports and more substitutions of Canadian goods for imports due to Canada's good price a cost performance.

Our economy should continue to expand next year at a broadly simila pace.On the basis of these growth forecasts, we would expect the trend of inflation to rise mo over the next 18 months but remain in the lower half of the Bank's 1 to 3 per cent target for inflation.

There is an increasing level of confidence, both at home and abroad, Canada's inflation will remain stable.Another source of uncertainty for the Bank at the present time is in estimating the mar unused capacity in the economy.

If economic activity expands as forecast, the traditional of measuring these things tells us that the current margin of economic slack should be up in the second half of next year.

However, the economy seems to have undergone some significant changes during the 1990s, and the traditional estimates of slack may no long accurate.

As a result, the Bank will be placing increased weight on a range of indicat assess the degree of pressure on the economy's production capacity.

What we have in min are such things as movements in inflation relative to expectations, growth of money credit, wage pressures, evidence of supply bottlenecks and the information provided to regional representatives from their business contacts.We will not know just how much the Canadian economy has changed until its capacity limit come under more pressure.

While the confidence of Canadians in ongoing low inflation allows monetary policy more room to accommodate demand pressures that test the limits o capacity, it will be very important for the Bank to be vigilant in following the ar indicators I have mentioned.

We must not undermine the solid basis of low inflation and interest rates that has been established in Canada.