David Dodge: Bank of Canada's views on the Canadain economy and its
monetary policy objective
Opening statement by Mr David Dodge, Governor of the Bank of Canada, to the House of Commons
Standing Committee on Finance, Ottawa, 1 May 2007.
* * *
Good morning, Mr. Chairman and members of the Committee. We appreciate the opportunity to meet
with your committee, which we usually do twice a year, following the release of our Monetary Policy
Report. We believe that these meetings help us to keep Members of Parliament and, through you, all
Canadians, informed of 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 then that the outlook
for growth in the Canadian economy had been revised down slightly from earlier expectations. In our
latest Monetary Policy Report, which we released last Thursday, we noted that Canada's economic
growth did indeed slow, but recently, inflation has been higher than expected. After considering the full
range of indicators, the Bank now judges that the Canadian economy was operating just above its
production capacity in the first quarter of this year.
We expect that, over the projection horizon, domestic demand will continue to be the main driver of
growth in Canada. With the U.S. slowdown now expected to be somewhat more prolonged than
previously projected, net exports should exert a slightly greater drag on Canada's growth in 2007. The
Canadian economy is now projected to grow by 2.2 per cent in 2007 and 2.7 per cent in both 2008
and 2009. This would return the economy to its production capacity in the second half of 2007 and
keep it there through 2008 and 2009.
Core inflation should remain slightly above 2 per cent over the coming months, given pressures on
capacity and the impact of higher core food prices. But with the economy projected to return to its
production capacity in the second half of this year and with further easing of pressures from housing
prices, upward pressure on core inflation is expected to moderate, bringing the core inflation rate back
to 2 per cent by the end of 2007.
Total CPI inflation is projected to rise above the 2 per cent inflation target in the second half of this
year, peaking below 3 per cent near the end of 2007 before returning to the target by mid-2008.
We at the Bank continue to judge that the risks to our inflation projection are roughly balanced,
although there is now a slight tilt to the upside.
Last Tuesday, the Bank left its key policy rate unchanged at 4 1/4 per cent. The current level of the
policy interest rate is judged, at this time, to be consistent with achieving the inflation target over the
medium term.
Mr. Chairman, Paul and I will now be happy to answer your questions.