david dodge : summary of the latest monetary policy report opening statement by mr david dodge, governor of the bank of canada, to the house of commons standing committee on finance, ottawa, 19 october 2006. * * * good afternoon, mr. chairman and members of the committee. we appreciate the opportunity to meet with this committee, usually twice a year following the release of our monetary policy reports. we were not able to meet last spring, so it has been a year since paul and i were last before this committee. we believe that 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. when paul and i appeared before the finance committee last october, we noted at that time, that the global and canadian economies were continuing to grow at a solid pace and that our economy appeared to be operating at full production capacity. in our latest monetary policy report, which we released this morning, we judge that the canadian economy is currently operating just above capacity. while global economic growth is expected to be a little higher than previously anticipated, a weaker near - term outlook for the u. s. economy has curbed the near - term prospects for canadian exports and growth. the bank's outlook for growth in the canadian economy has been revised down slightly from that outlined in july's monetary policy report update. the bank's base - case projection now calls for average annual gdp growth of 2. 8 per cent in 2006, 2. 5 per cent in 2007, and a return to 2. 8 per cent in 2008. weakness in labour productivity growth has led the bank to lower its assumption for potential growth to 2. 8 per cent for the 2006 - 08 period. together, these factors imply that the small amount of excess demand now in the economy will be eliminated by mid - 2007. core inflation is expected to move a bit above 2 per cent in the coming months but return to the 2 per cent target by the middle of 2007 and remain there through to the end of 2008. lower energy prices have led to a downward revision of the near - term projection for total cpi inflation. total inflation ( which includes the temporary impact of the gst reduction ) will likely average about 1 1 / 2 per cent through the second quarter of 2007, before returning to the 2 per cent target and remaining there through to the end of 2008. as we noted at the time

these activities make financial markets more complete and, so, enhance their efficiency. the size and sophistication of pension plans also lead them to be actively interested in good corporate governance, thus contributing to market discipline, which supports overall market efficiency. the decline in defined - benefit pensions in recent years, defined - benefit pension plans have been in decline. the number of canadians covered by defined - benefit plans has fallen by roughly 5 per cent since 1992. while the large majority of employer - sponsored plans are still of the defined - benefit variety, defined - contribution plans have grown significantly. we have seen many employers either collapse their defined - benefit plans or restrict new entrants into the plans. we have also seen increasing deficits in many defined - benefit pension plans. the ability of individuals with rrsps to use a registered retirement income fund rather than a life annuity does allow more sophisticated retirees to mitigate this risk somewhat. i am not aware of any canadian research on this topic. but it is a reasonable assumption that these results would apply to canada. but many defined - benefit plans lack portability, which lessens their attractiveness. arbitrage refers to a trading strategy that tries to take advantage of differences in prices for the same asset trading on different exchanges. 3 / 5 while part of the decline in defined - benefit plans comes from developments in the economy and the labour force, part is also due to the incentives under which these plans operate. let me elaborate. defined - benefit plans should operate so that the expected value of all benefits to be paid out equals the expected value of all contributions plus the expected returns on investments. but when the actual value of one of these variables differs from the expected value, the sponsor of the plan takes on responsibility for making up any difference. what would make a sponsor accept this responsibility? one reason would be if sponsors could mitigate the risk of worse - than - expected outcomes by being allowed to benefit from better - thanexpected outcomes. but while there is no question that the sponsor is responsible for any deficit in the plan, it is not at all clear that the sponsor benefits from any surplus that may be generated. the question of who " owns " a surplus in a defined - benefit plan has been before many different courts at different levels and in different jurisdictions in recent years. while the precise answer depends on the specific wording of the rules of any given pension plan, in general, provincial and federal pension law has evolved so that employees