David Dodge: Summary of the latest Monetary Policy Report
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, 21 October 2004.
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Today, we released our October Monetary Policy Report. The Report reviews economic and financial
trends in the context of Canada's inflation-control strategy.
The Canadian economy has grown faster than was projected in last April's Monetary Policy Report
and the July Update, largely because of a surge in exports. It is now operating near its production
capacity and continues to adjust to global economic developments.
The Bank's base-case projection for the period to the end of 2006 calls for aggregate demand for
Canadian goods and services to expand, on average, at about the same rate as potential output.
Given the effects of higher oil prices and the past appreciation of the Canadian dollar, the Bank
projects economic growth to be slightly less than 3 per cent in 2005, and slightly more than 3 per cent
in 2006.
With the economy expected to remain near its production capacity throughout this period, core
inflation is projected to move back up to the 2 per cent target by the end of 2005. Given the path
suggested by futures prices for crude oil, the Bank expects total CPI inflation will rise to the top of the
1 to 3 per cent target range in the first half of 2005, before falling slightly below core inflation in early
2006.
Against this background, the Bank raised its target for the overnight rate to 2.5 per cent on 19 October.
The base-case projection assumes further reduction of monetary stimulus over time, to keep the
economy near its production potential and to achieve the inflation target. The pace of interest rate
increases will depend on the Bank's continuing assessment of the prospects for factors that affect
pressures on capacity and, hence, inflation.
There are significant risks and uncertainties around this base-case projection, related to the
adjustment to changes in the global economy, including changes in commodity prices and exchange
rates. The risks surrounding global economic prospects relate primarily to the evolution of oil prices,
the pace of expansion in China, the way in which current account imbalances in the United States and
East Asia will be resolved, and geopolitical developments.