David Dodge: Summary of the latest 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 Update, Ottawa,
24 January 2008.
* * *
Good morning. I'm pleased to be here with you today, for my final press conference as
Monetary Policy Report
Governor of the Bank of Canada, to discuss our January Update.
The Canadian economy continues to operate above its production capacity, despite some
slowing in growth and inflation in the fourth quarter of 2007. Financial conditions have
deteriorated since October, leading to tighter credit conditions in industrialized countries.
Given this, and a deeper and more prolonged decline in the U.S. housing sector, the outlook
for the U.S. economy in 2008 is now significantly weaker than at the time of the October
MPR.
The weaker U.S. economy will lead to additional downward pressure on Canada's export
growth. Despite tighter credit conditions, domestic demand in Canada is expected to remain
strong, supported by continued income growth associated with the increase in commodity
prices seen since October. Overall, the Bank now projects that the Canadian economy will
expand by 1.8 per cent in 2008 and 2.8 per cent in 2009. This growth profile implies that the
economy will move into excess supply in the second quarter of this year, and then return to
balance in early 2010.
Inflation is projected to fall below 1 1/2 per cent by the middle of this year before returning to
2 per cent by the end of 2009. This reflects a price-level adjustment related to increased
competitive pressures in the retail sector stemming from the level of the Canadian dollar, as
well as the recent reduction in the GST. Excluding the impact of the GST reduction, total CPI
inflation is projected to average close to the 2 per cent target throughout 2008 and 2009.
Of course, there are a number of upside and downside risks to the Bank's base-case
projection for inflation. But overall, we judge these risks to be roughly balanced.
On 4 December and on 22 January, the Bank lowered its target for the overnight rate by
onequarter of one percentage point, bringing it to 4 per cent. Further monetary stimulus is likely
to be required in the near term to keep aggregate supply and demand in balance, and to
return inflation to target over the medium term.