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 Update, Ottawa,
12 July 2007.
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Today, we released the July update to our Monetary Policy Report, which discusses current
economic and financial trends in the context of Canada's inflation-control strategy.
Economic growth and inflation in Canada in the first half of this year have been stronger than
was expected in the April Monetary Policy Report. The Bank judges that the economy is now
operating further above its production potential than was projected in April.
The Canadian economy is now projected to grow somewhat more strongly in 2007 and
somewhat more slowly in 2008 and 2009 than we previously projected. Higher interest rates
across the yield curve and a stronger Canadian dollar are expected to bring aggregate
demand and supply in Canada back into balance in 2009.
Inflation is projected to be slightly higher and more persistent than in the April Report. With
the direct effect of the GST cut ending, and with the impact of the temporary decrease in
gasoline prices in late 2006, total inflation is expected to peak at about 3 per cent in the
fourth quarter of this year. However, as excess demand diminishes, total CPI and core
inflation should decline to 2 per cent by early 2009.
The main upside risk to the Bank's inflation projection is that household demand in Canada
could be stronger than projected. Higher levels of household borrowing and broad money
growth point to this risk. On the downside, the adjustment in the Canadian economy to the
rapid appreciation of the Canadian dollar may dampen demand for Canadian goods and
services and reduce inflationary pressures more than projected. As well, the ongoing
adjustment in the U.S. housing sector could be more prolonged. In the context of our new
projection, the upside and downside risks appear to be roughly balanced.
On Tuesday, the Bank raised its key policy interest rate by one-quarter of one percentage
point to 4 1/2 per cent, and we said that some modest further increase in the overnight rate
may be required to bring inflation back to the target over the medium term.
Paul and I would now be happy to take your questions.