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Bank of Canada releases Monetary Policy Report

OTTAWA, Ontario, 21 October 2004 — The Bank of Canada today released its October Monetary Policy Report, which reviews economic and financial trends in the context of Canada's inflation-control strategy.

The Canadian economy has grown faster than was projected in last April's Monetary Policy Report and the July Update, largely because of a surge in exports. It is now operating near its production capacity and continues to adjust to global economic developments.

The Bank's base-case projection for the period to the end of 2006 calls for aggregate demand for Canadian goods and services to expand, on average, at about the same rate as potential output. Given the effects of higher oil prices and the past appreciation of the Canadian dollar, the Bank projects economic growth to be slightly less than 3 per cent in 2005, and slightly more than 3 per cent in 2006.

With the economy expected to remain near its production capacity throughout this period, core inflation is projected to move back up to the 2 per cent target by the end of 2005. Given the path suggested by futures prices for crude oil, the Bank expects total CPI inflation will rise to the top of the 1 to 3 per cent target range in the first half of 2005, before falling slightly below core inflation in early 2006.

Against this background, the Bank raised its target for the overnight rate to 2.5 per cent on 19 October. To keep the economy near its production potential and to achieve the inflation target, further reduction of monetary stimulus will be required over time with the pace of interest rate increases depending on the Bank's continuing assessment of the prospects for factors that affect pressures on capacity and, hence, inflation.

There are significant risks and uncertainties around this base-case projection, related to the adjustment to changes in the global economy, including changes in commodity prices and exchange rates. The risks surrounding global economic prospects relate primarily to the evolution of oil prices, the pace of expansion in China, the way in which current account imbalances in the United States and East Asia will be resolved, and geopolitical developments.

Annie Portelance
(613) 782-8782