Bank of Canada keeps target for the overnight rate at 4 1/2 per cent

    OTTAWA, Oct. 16 /CNW Telbec/ - The Bank of Canada today announced that it
is maintaining its target for the overnight rate at 4 1/2 per cent. The
operating band for the overnight rate is unchanged, and the Bank Rate remains
at 4 3/4 per cent.
    Against a backdrop of robust global economic expansion and strong
commodity prices, information received since the July Monetary Policy Report
Update (MPRU) indicates that the Canadian economy is now operating further
above its production potential than had been previously expected. The core
rate of inflation, which has been above 2 per cent for the past year, was
2.2 per cent in August. Total consumer price inflation fell temporarily in
August to 1.7 per cent, having been above the 2 per cent inflation target
since the spring.
    Since the July MPRU, the outlook for the U.S. economy has weakened
because of greater-than-expected slowing in the housing sector. The Bank has
revised down its projection for U.S. growth to 1.9 per cent in 2007 and
2.1 per cent in 2008. U.S. growth is expected to pick up to 3 per cent in
    The Canadian dollar traded in a range of 93 to 95.5 cents U.S. in July
and August, but since then it has appreciated sharply to as high as
1.03 dollars U.S. In the Bank's new base-case projection, the Canadian dollar
is assumed to average 98 cents, the mid-point of the range since the July
MPRU. As well, there has been a tightening of credit conditions stemming from
the financial market developments this summer. For Canada, the Bank assumes
that the cost of credit for firms and households relative to the overnight
rate will be 25 basis points higher over the projection period than it was
prior to the summer developments.
    Despite these tighter credit conditions, momentum in domestic demand in
Canada is expected to remain strong. The combined effect of a weaker U.S.
outlook and a higher assumed level of the Canadian dollar implies, however,
that net exports will exert a more significant drag on the economy in 2008 and
2009 than previously expected. As a result, the Canadian economy is projected
to grow by 2.6 per cent in 2007, 2.3 per cent in 2008, and 2.5 per cent in
2009. This growth profile implies that aggregate supply and demand will move
back into balance in early 2009. Both core and total CPI inflation are
projected to return to 2 per cent in the second half of 2008.
    In line with this projection, the Bank judges, at this time, that the
current level of the target for the overnight rate is consistent with
achieving the inflation target over the medium term.
    There are significant upside and downside risks to the Bank's inflation
projection. On the upside, excess demand in the Canadian economy could persist
longer than projected. This could come from two sources: higher growth in
household spending than projected and lower growth in productivity than
assumed. On the downside, if the Canadian dollar exchange rate were to persist
above the 98 cent U.S. level assumed over the projection horizon for reasons
not associated with stronger-than-projected demand for Canadian products,
Canadian output and inflation would be lower. In addition, the effect of the
past appreciation of the Canadian dollar on demand and inflation could be
stronger than expected and the effect of the weakness in the U.S. housing
sector could be greater than anticipated. All factors considered, the Bank
judges that the risks to its inflation projection are roughly balanced, with
perhaps a slight tilt to the downside.

    A full update of the Bank's outlook for growth and inflation will be set
out in the Monetary Policy Report, to be published on 18 October 2007.

    Information note:

    The Bank of Canada's next scheduled date for announcing the overnight
rate target is 4 December 2007.

For further information:

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

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