Monetary Policy Report – April 2003
The global economic outlook has been clouded by a high degree of uncertainty, accentuated most recently by the war in Iraq. This uncertainty has been an important factor in the recent marked volatility in world oil prices and financial markets. Some of the geopolitical and financial uncertainty has lifted more recently, and in its base-case scenario the Bank of Canada assumes that these uncertainties will continue to recede. As a result, confidence among businesses, households, and financial markets is expected to improve significantly by year-end. Nevertheless, global economic uncertainty remains important, especially in the near term. The Bank now projects that economic expansion in both the United States and Canada will begin to strengthen towards the end of this year and will be above the growth of potential output during 2004. The scope for above-potential growth is greater in the United States than in Canada because of the larger amount of excess capacity in the United States.
There is, however, a wide range of possible outcomes, both stronger and weaker, around this base-case view. The result will depend critically on the evolution of business and household confidence and global economic uncertainty. The Bank will, therefore, be paying close attention to these factors over the coming months. Nevertheless, most important in these times of uncertainty is the Bank’s continued focus on taking the appropriate actions that, cumulatively, will return inflation to our 2 per cent target for inflation control.