david dodge : brief overview of the canadian economy opening statement by mr david dodge, governor of the bank of canada, to the standing senate committee on banking, trade and commerce, ottawa, 2 may 2007. * * * good afternoon, mr. chairman and committee members. 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 the senate 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 your 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

rate. when the interest rate, as forecast in the baseline scenario, is raised to a more normal level, norges bank will be able to assess the effects of interest rate changes and other new information about economic developments. according to our projections, inflation will be close to target three years ahead. we are uncertain as to the functioning of the economy and how long it will take for the resource shortages observed in some sectors of the norwegian economy to translate into higher inflationary pressures. this may warrant small steps in interest - rate setting. employment is now rising more rapidly than expected. corporate earnings are rising sharply, with higher growth in corporate demand for credit. the sharp increase in household debt is persisting. house price inflation remains high. prices for oil and several other commodities have picked up further. at the same time, the underlying rise in consumer prices remains low. so far, a tighter labour market does not seem to have resulted in higher - than - expected pay increases, but there is a risk that wage growth may subsequently rise faster than projected. the krone is stronger than assumed. overall, there are not sufficient grounds for changing the outlook for inflation and output or the risk assessment. thank you for your attention.