Canadian January Monetary Policy Report

The Bank of Canada released its January 2008 Monetary Policy Report Update. Highlights include expectations that the Canadian economy will 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.


What about impact from south of the border? The weaker U.S. economy will put additional downward pressure on Canada’s export
growth. The dollar is expected to continue its strong presence adding more pressure to the already tight export sector. 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.

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 pricelevel 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.
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. So far, no plans for a ‘stimulus package’ similar to the one issued by the US government. Monetary policy will be used to slow the slow.

[tags]monetary policy, monetary report, canadian policy, canada monetary[/tags]

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