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Bank of Canada releases
Monetary Policy Report Update
The Bank
of Canada released its July Monetary Policy Report Update. In it, 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
the prices of certain commodities, particularly energy. While the first two
developments are evolving roughly in line with expectations outlined in the
April Monetary Policy Report, many commodity prices continue to outpace earlier
expectations, which has altered the outlook for global and domestic inflation.
The
Update noted that 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. 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, bringing 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 the projection. On the upside, domestic demand could be
greater than projected, potential output growth could be lower than assumed, and
global inflationary pressures could lead to higher-than-projected import costs
for Canada.
On the downside, commodity prices could be weaker than assumed, U.S. growth
could be weaker than expected, and continued strains in global financial markets
could have a greater-than-projected impact on global growth and the cost and
availability of credit in
Canada.
Weighing the implications of these considerations, the Bank views the risks to
its projection for inflation as balanced.
Against
this backdrop, the Bank judges that the current level of the target for the
overnight rate – 3 per cent – remains appropriate. The Bank will continue to
monitor carefully the evolution of risks, together with economic and financial
developments in the Canadian and global economies, and set monetary policy
consistent with achieving the 2 per cent inflation target over the medium term.
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