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

. in september, increasing doubts were voiced as to the sustainability of the economic upswing in the us : compared with earlier cycles, the essential element of an improving labour market was missing. this led to a consolidation on the capital markets even though the economic indicators remained largely positive. with the first signs of the us labour market recovering at the end of september, coupled with rapid growth in gross domestic product in the third quarter ( 8. 2 % ), the strength of the economic revival in the us economy was confirmed. just how sustained this pick - up proves to be will become evident in the coming months when the extraordinary fiscal and monetary stimuli weaken. foreign exchange markets fluctuations in the us dollar dominated the foreign exchange markets. after having lost considerable ground during the first half of the year, the greenback rebounded slightly by october amid growing signs of an acceleration of growth. recently, the focus of market participants returned to the sustainability of the us recovery and the continued rise in america ’ s current account deficit. as a result, the dollar weakened again ( see graph 2 ). since the middle of the year, the swiss franc has moved sideways against the euro. heavier fluctuations were recorded vis - a - vis the dollar. with positive economic data emanating in the us from june onwards, the franc initially weakened before firming again as part of the general dollar consolidation witnessed since september. on the whole, the swiss franc hardly registered any independent movements. it depreciated strongly during the first half of the year after our interest rate decision and has remained stable since the summer. in relation both to switzerland ’ s 24 major trading partners and to the euro zone, the real exchange rate index of the swiss franc is now slightly below its level at the beginning of 1999, i. e. at the time of the euro launch. gold market owing to the more favourable economic situation, raw material prices continued the rise which had started in 2001. at over 400 usd / ounce, the gold price was at a seven - year high at the beginning of december. because of the weak dollar, the gold price increase in francs was more modest. however, its peak of approximately 17, 000 chf / kg was still the highest for several years. the main reason for this rise was persistently modest hedging activity by gold producers. equity markets international equity markets exhibited a positive course overall, steadily making up lost ground after their mid - march low ( see graph 3 ). as the equity