david dodge : economic and financial trends in canada opening statement by mr david dodge, governor of the bank of canada, to the house of commons finance committee, ottawa, 26 october 2004. * * * good afternoon, mr. chairman and members of the committee. we appreciate the opportunity to meet with this committee twice a year, following the release of our monetary policy reports. 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. since we last met, we are pleased to have issued canada ’ s new $ 20 bank note with enhanced security features. the new note began circulating on 29 september. last thursday, we released our october monetary policy report, which reviews economic and financial trends in the context of canada ’ s inflation - control strategy. when paul and i appeared before this committee last april, we told you that the economy was judged to be operating significantly below its potential. that is no longer the case, because the canadian economy has grown faster than was projected in last april ’ s monetary policy report and the july update. this stronger growth was largely due to a surge in exports. the economy is now operating near its production capacity and continues to adjust to global economic developments. the bank ’ s base - case projection for the period to the end of 2006 calls for aggregate demand for canadian goods and services to expand, on average, at about the same rate as potential output. given the effects of higher oil prices and the past appreciation of the canadian dollar, the bank projects economic growth to be slightly less than 3 per cent in 2005, and slightly more than 3 per cent in 2006. with the economy expected to remain near its production capacity throughout this period, core inflation is projected to move back up to the 2 per cent target by the end of 2005. that is the same projection that we made last april. however, given the path suggested by futures prices for crude oil, the bank expects total cpi inflation will rise to the top of the 1 to 3 per cent target range in the first half of 2005, before falling slightly below core inflation in early 2006. against this background, the bank raised its target for the overnight rate to 2. 5 per cent on 19 october. the base - case projection assumes further reduction of monetary stimulus over time, to keep the economy near its production potential and to achieve the inflation target. i want to emphasize that the

threat of protectionism, vulnerabilities in emerging markets and financial market volatility have become more prominent recently. fiscal policies in several euro area countries might be less neutral than we expected some time ago. regarding inflation developments, hicp inflation stood at 2. 0 % in august, down from 2. 1 % in july. headline inflation remains somewhat higher than in the first months of the year, reflecting the strong increase in oil prices. measures of underlying inflation remain generally muted but have been increasing from earlier lows as domestic price pressures are strengthening and broadening. underlying inflation is expected to increase further over the coming months as the tightening labour market is pushing up wage growth. for example, annual growth in negotiated wages in the euro area increased from 1. 5 % in 2017 to 1. 7 % in the first quarter to 2018 and to 2. 2 % in the second quarter. this supports our confidence that the pick - up in wage growth will 1 / 4 bis central bankers'speeches continue, as wage agreements often last two years or more. looking forward, annual rates of hicp inflation are likely to hover around current levels in the coming months and are projected to reach 1. 7 % in each year between now and 2020. this stable profile conceals a slowing contribution from the non - core components of the general index, and a relatively vigorous pick - up in underlying inflation. reflecting these dynamics, the ecb projections foresee inflation excluding food and energy reaching 1. 8 % in 2020. the ecb ’ s monetary policy and its effectiveness overall, recent developments vindicate the governing council ’ s earlier assessments of the medium - term inflation outlook. accordingly, at our last meeting the governing council decided to maintain the significant monetary policy stimulus in its present configuration and, in line with the conditional plan announced at our press conference in june in riga, to reduce the monthly pace of net asset purchases to €15 billion from october until the end of the year. we anticipate that, subject to incoming data confirming our medium - term inflation outlook, we will then end net purchases. this doesn't mean that our monetary policy will cease to be accommodative. for our baseline expectations of a rising inflation path to materialise, we need to remain patient, prudent and persistent in calibrating the monetary policy stance. in line with this approach, we will continue to provide substantial monetary stimulus by combining three policy measures : first, our enhanced forward guidance on the key