Mark Carney: Summary of the latest Monetary Policy Report
Opening statement by Mr Mark Carney, Governor of the Bank of Canada, at a press
conference following the release of the Monetary Policy Report Update, Ottawa,
17 July 2008.
* * *
Good morning. We are pleased to be here with you today to discuss the July Monetary Policy
Report
Update, which we published this morning.
In the Update, the Bank described three major developments affecting the Canadian
economy: protracted weakness in the U.S. economy, ongoing turbulence in global financial
markets, and sharp increases in certain commodity prices, particularly energy. While the first
two of these developments are evolving roughly in line with expectations, many commodity
prices continue to outpace earlier expectations, which has altered the outlook for global and
domestic inflation.
Although economic growth in Canada in the first quarter of 2008 was weaker than expected,
final domestic demand - supported by strong terms of trade - continued to expand at a solid
pace. The Canadian economy is judged to have moved into slight excess supply in the
second quarter of 2008, and this excess supply is expected to increase through the balance
of the year. High terms of trade, accommodative monetary policy, and a gradual recovery in
the U.S. economy are expected to generate above-potential economic growth starting early
next year. This will bring the economy back to full capacity around mid-2010.
Assuming energy prices follow current futures prices, total CPI inflation is projected to rise
temporarily above 4 per cent, peaking in the first quarter of 2009. As energy prices stabilize,
and with medium-term inflation expectations remaining well anchored, total inflation is
projected to converge to the core rate of inflation, at the 2 per cent target, in the second half
of 2009. Core inflation is projected to remain well contained.
The three major developments affecting the Canadian economy pose significant upside and
downside risks to our projection. On the upside, domestic demand could be greater than
projected, given the strength of Canada's terms of trade and the momentum of household
credit growth. Potential output could be lower than assumed, given ongoing weakness in
labour productivity. Global inflationary pressures could also lead to higher-than-projected
import costs for Canada. On the downside, commodity prices could be weaker than
assumed. Growth in the U.S. economy could also be weaker than expected, particularly in
those sectors that are most relevant for Canadian exports. As well, continued strains in
global financial markets could have a greater-than-projected impact on global growth and on
the cost and availability of credit in Canada. Weighing the implications of these
considerations, the Bank views the risks to its projection for inflation as balanced.
Against this backdrop, the Bank judges that the current level of the target for the overnight
rate - 3 per cent - remains appropriate. We will continue to monitor carefully the evolution of
risks, together with economic and financial developments in the Canadian and global
economies, and set monetary policy consistent with achieving the 2 per cent inflation target
over the medium term.