Bank of Canada releases Monetary Policy Report Update



    OTTAWA, Jan. 24 /CNW Telbec/ - The Bank of Canada today released its
January Monetary Policy Report Update. In this Update, the Bank said that the
Canadian economy continues to operate above its production capacity, despite
some slowing in growth in the fourth quarter of 2007. Both total and core
inflation have been lower than projected in the October Monetary Policy
Report, largely reflecting a price-level adjustment related to increased
competitive pressures in the retail sector stemming from the level of the
Canadian dollar.
    Financial conditions have deteriorated since October, leading to tighter
credit conditions in industrialized countries. Given this, and a deeper and
more prolonged decline in the U.S. housing sector, the U.S. economic outlook
for 2008 has been revised downwards significantly.
    The weaker U.S. economy will put additional downward pressure on Canada's
export growth. Despite tighter credit conditions, domestic demand in Canada is
expected to remain strong, supported by continued income growth associated
with high commodity prices. Overall, the Bank now projects that the Canadian
economy will expand by 1.8 per cent in 2008 and 2.8 per cent in 2009. This
implies that the economy will move into excess supply in the second quarter of
2008, and then return to balance in early 2010.
    Both core and total CPI inflation are projected to fall below 1 1/2 per
cent by the middle of 2008 before returning to 2 per cent by the end of 2009.
This primarily reflects the price-level adjustment noted above and, for total
inflation, the recent reduction in the GST. Excluding the impact of the GST
reduction, total inflation is projected to average close to the 2 per cent
target throughout 2008 and 2009.
    The risks to the Bank's inflation projection are judged to be roughly
balanced. On the upside, there is continued strong momentum in domestic demand
growth, and capacity pressures could be stronger than judged, especially if
weak productivity growth were to persist. On the downside, the tightening in
credit conditions globally and in Canada could be greater and more protracted
than assumed, and there could be a more prolonged slowdown in the U.S.
economy. As well, competitive pressures in Canada's retail sector could put
more downward pressure on prices than assumed.
    On 4 December and on 22 January, the Bank lowered its target for the
overnight rate by one-quarter of one percentage point, bringing it to 4 per
cent. Further monetary stimulus is likely to be required in the near term to
keep aggregate supply and demand in balance, and to return inflation to target
over the medium term.




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For further information: Jeremy Harrison, (613) 782-8782


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