Monetary Policy Report Update – July 2006

Overall, the outlook for economic growth and inflation in Canada is largely unchanged from that set out in the April Monetary Policy Report. Growth in the first half of 2006 appears to have been a little stronger, and the Canadian dollar has traded in a higher range than envisaged in the last Report. As well, there was a further shift in the composition of demand towards consumption and away from exports. This additional strength in domestic demand is expected to persist into next year, but it should be more than offset by a weaker outlook for net exports, owing primarily to the recent strength in the Canadian dollar. Hence, in aggregate, growth in 2007–08 is expected to be a little weaker than projected in April.

The economy is currently judged to be operating just above its production capacity. With some anticipated moderation in U.S. economic growth, combined with past interest rate and exchange rate increases, the Canadian economy is projected to return to its production capacity by the end of 2008. The Bank projects real GDP growth of 3.2 per cent in 2006, 2.9 per cent in 2007, and 2.8 per cent in 2008.