mark carney : summary of the latest monetary policy report opening statement by mr mark carney, governor of the bank of canada, at a press conference following the release of the monetary policy report update, ottawa, 17 july 2008. * * * good morning. we are pleased to be here with you today to discuss the july monetary policy report update, which we published this morning. in the update, the bank described three major developments affecting the canadian economy : protracted weakness in the u. s. economy, ongoing turbulence in global financial markets, and sharp increases in certain commodity prices, particularly energy. while the first two of these developments are evolving roughly in line with expectations, many commodity prices continue to outpace earlier expectations, which has altered the outlook for global and domestic inflation. although economic growth in canada in the first quarter of 2008 was weaker than expected, final domestic demand – supported by strong terms of trade – continued to expand at a solid pace. the canadian economy is judged to have moved into slight excess supply in the second quarter of 2008, and this excess supply is expected to increase through the balance of the year. high terms of trade, accommodative monetary policy, and a gradual recovery in the u. s. economy are expected to generate above - potential economic growth starting early next year. this will bring the economy back to full capacity around mid - 2010. assuming energy prices follow current futures prices, total cpi inflation is projected to rise temporarily above 4 per cent, peaking in the first quarter of 2009. as energy prices stabilize, and with medium - term inflation expectations remaining well anchored, total inflation is projected to converge to the core rate of inflation, at the 2 per cent target, in the second half of 2009. core inflation is projected to remain well contained. the three major developments affecting the canadian economy pose significant upside and downside risks to our projection. on the upside, domestic demand could be greater than projected, given the strength of canada's terms of trade and the momentum of household credit growth. potential output could be lower than assumed, given ongoing weakness in labour productivity. global inflationary pressures could also lead to higher - than - projected import costs for canada. on the downside, commodity prices could be weaker than assumed. growth in the u. s. economy could also be weaker than expected, particularly in those sectors that are most relevant for canadian exports. as well, continued strains in global financial markets could have a greater - than - projected impact on global

has also proven enormously helpful during the crisis and should continue to be so during the eventual exit. the coherence of policy and the message derived from one fixed objective provide greater certainty for financial markets in a time of considerable turmoil. the ability to maintain inflation expectations has helped keep real interest rates low and provide the necessary monetary stimulus. the inflation anchor remains essential even when providing extraordinary guidance. this is why the bank of canada ’ s current commitment – that our target rate is projected to remain at its effective lower bound through the end of the second quarter of 2010 – is explicitly conditional on the outlook for inflation. different time horizons for price and financial stability require flexibility the main challenge for joint optimization is that financial and price stability share common determinants but have different time horizons. price stability dynamics continuously reflect real shocks and / or policy responses, while financial vulnerabilities are much less predictable. they build over time and can persist for longer than expected. because of this mismatch, policy actions consistent with targeting one may undermine the other. 14 this may partially explain why asset prices are not accurate predictors of goods prices. see walsh ( 2009, p. 29 ). this timing difference can be partially bridged in a couple of ways. first, housing prices can be incorporated in the consumer price index, as they are in canada. second, monetary policy communications could adapt to reflect the behavioural dynamics of financial systems. an effective communications strategy for normal states may prove counterproductive in exuberant states. how central banks communicate can influence the degree to which low, stable, and predictable inflation fosters excess credit growth. it is important that markets understand how a central bank formulates policy, but that does not equate to perfect foresight. differences in judgment and the fundamental uncertainties surrounding the economic outlook should mean occasional differences in view. these should be particularly marked during turning points in the economic cycle. as the review of liquidity cycles suggests, wider “ markets ” in expected economic outcomes ( which would mean greater short - term volatility ) could promote longterm financial stability. 15 the alternative would be to generate price instability to prevent financial instability. that is, the price objective might have to become less stable in order to disrupt the endogenous liquidity creation that comes from relatively stable, predictable rate paths. 16 this, rather than a higher inflation rate ( if reliably achieved ), would appear necessary to disrupt the dynamics described earlier. the trade - off