Release of the Monetary Policy Report Update

This morning, we released our Update to last November's Monetary Policy Report. This Update was completed at the time of the Bank Rate announcement on 23 January. It presents the analysis on which we based our decision to reduce the Bank Rate by 25 basis points.

As discussed in the Update, world economic growth has slowed more than we were anticipating three months ago, mainly because of a more pronounced slowdown in the U.S. economy since the third quarter of last year.

Through the second half of 2000, despite lower U.S. demand for Canadian products, the pace of economic expansion in Canada remained solid, bolstered by strong growth in domestic demand. Indeed, real GDP in 2000 is estimated to have grown by 5 per cent, on an annual average basis. And by year-end, inflation, measured by the 12-month rate of increase in the core CPI, had moved up somewhat faster than anticipated—to close to 2 per cent.

Let me now look ahead. Although the Canadian economy began 2001 from a strong base, with signs of pressures in some labour and product markets, recent developments have altered the risks and uncertainties in our economic outlook. Most importantly, the abrupt weakening of U.S. economic activity raises the question of what the implications for Canada will be.

In the Update, we revised down our projection for Canada's economic growth this year to about 3 per cent. Core inflation is projected to stabilize at about 2 per cent, and total CPI inflation is expected to converge with the core rate in the second half, assuming that world crude oil prices stay at or below current levels. That projection also assumed that the U.S. economy would expand by 2.0 to 2.5 per cent, on average, in 2001, with a weak first half followed by a relatively strong rebound in the second half.

Based on the accumulating evidence, it now appears that U.S. economic activity in the first half of the year will be weaker than projected in the Update, but we still expect it to rebound in the second half. This poses some near-term risks for the Canadian economy. At the same time, high levels of employment and rising disposable incomes are working to sustain domestic demand growth here in Canada. And our solid fundamentals—low inflation, a declining public sector debt relative to the size of our economy, and business restructuring—have put the Canadian economy in a better position to adjust to external developments.

Overall, despite the near-term uncertainties, the Bank remains positive about our economic prospects for 2001. We will continue to monitor closely the evolving situation.