Bank of Canada releases Monetary Policy Report Update



    OTTAWA, July 17 /CNW Telbec/ - The Bank of Canada today 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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For further information: Jeremy Harrison, (613) 782-8782


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