David Dodge: Summary of the latest Monetary Policy Report
Opening statement by Mr David Dodge, Governor of the Bank of Canada, to the House of Commons
Standing Committee on Finance, Ottawa ,19 October 2006.
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Good afternoon, Mr. Chairman and members of the Committee. We appreciate the opportunity to meet
with this committee, usually twice a year following the release of our Monetary Policy Reports. We
were not able to meet last spring, so it has been a year since Paul and I were last before this
committee. We believe that these meetings help us keep Members of Parliament and, through you, all
Canadians, informed about the Bank's views on the economy and about the objective of monetary
policy and the actions we take to achieve it.
When Paul and I appeared before the Finance Committee last October, we noted at that time, that the
global and Canadian economies were continuing to grow at a solid pace and that our economy
appeared to be operating at full production capacity.
In our latest Monetary Policy Report, which we released this morning, we judge that the Canadian
economy is currently operating just above capacity. While global economic growth is expected to be a
little higher than previously anticipated, a weaker near-term outlook for the U.S. economy has curbed
the near-term prospects for Canadian exports and growth.
The Bank's outlook for growth in the Canadian economy has been revised down slightly from that
outlined in July's Monetary Policy Report Update. The Bank's base-case projection now calls for
average annual GDP growth of 2.8 per cent in 2006, 2.5 per cent in 2007, and a return to 2.8 per cent
in 2008. Weakness in labour productivity growth has led the Bank to lower its assumption for potential
growth to 2.8 per cent for the 2006-08 period. Together, these factors imply that the small amount of
excess demand now in the economy will be eliminated by mid-2007.
Core inflation is expected to move a bit above 2 per cent in the coming months but return to the 2 per
cent target by the middle of 2007 and remain there through to the end of 2008. Lower energy prices
have led to a downward revision of the near-term projection for total CPI inflation. Total inflation (which
includes the temporary impact of the GST reduction) will likely average about 1 1/2 per cent through
the second quarter of 2007, before returning to the 2 per cent target and remaining there through to
the end of 2008.
As we noted at the time of our 6 September interest rate announcement, the risks around the
basecase projection are judged to be a little greater than at the time of the July Update. The main upside
risk relates to the momentum in household spending and housing prices, while the main downside risk
is that the U.S. economy could slow more sharply than expected, leading to lower Canadian exports.
The Bank judges that the risks to its inflation projection are roughly balanced.
On 17 October, we left our key policy rate unchanged at 4.25 per cent. The current level is judged, at
this time, to be consistent with achieving the inflation target over the medium term. We at the Bank will
continue to pay close attention to the evolution of risks, as well as to economic and financial
developments in the Canadian and global economies.