David Dodge: Monetary policy report update
Opening statement by Mr David Dodge, Governor of the Bank of Canada, at a press
conference following the release of the Monetary Policy Report, Ottawa, 18 October 2007.
* * *
Today, we released the October Monetary Policy Report, which discusses current economic
and financial trends in the context of Canada's inflation-control strategy.
July Monetary Policy Report
Since the Update, and against a backdrop of robust global
economic expansion and strong commodity prices, the Canadian economy has been
stronger than projected. It is now operating further above its production potential than had
been previously expected.
Since the July Update, the outlook for the U.S. economy has weakened. The Canadian dollar
has appreciated sharply, and credit conditions have tightened. Despite these tighter credit
conditions, the momentum of domestic demand in Canada is expected to remain strong. The
combined effect of a weaker U.S. outlook and a higher assumed level for the Canadian dollar
implies, however, that net exports will exert a more significant drag on the economy in 2008
and 2009 than previously expected. As a result, Canada's gross domestic product is
projected to grow by 2.6 per cent in 2007, 2.3 per cent in 2008, and 2.5 per cent in 2009.
With the economy moving back towards balance, and with the direct effect of the stronger
Canadian dollar on consumer prices, core inflation is projected to gradually decline to 2 per
cent in the second half of 2008. Total CPI inflation is expected to peak at about 3 per cent
later this year and then move back down to the 2 per cent target in the second half of 2008.
But there are a number of upside and downside risks to the Bank's inflation projection. The
main upside risk is that excess demand in the Canadian economy could persist longer than
projected. The main downside risk is that output and inflation could be lower if the Canadian
dollar were to be persistently higher than the assumed average level of 98 cents U.S. for
reasons not associated with demand for Canadian products.
All factors considered, the Bank judges that the risks to its inflation projection are roughly
balanced, with perhaps a slight tilt to the downside.
The Bank also judges, at this time, that the current level of the target for the overnight rate is
consistent with achieving the inflation target over the medium term.