Bank of Canada Monetary Policy Report July 17 2013

Good morning. Tiff and I are pleased to be here with you today to discuss the

July Monetary Policy Report, which the Bank published this morning. 

• Global economic growth remains modest, although the pace of economic

activity varies significantly across the major economies.

• The U.S. economic expansion is proceeding at a moderate pace. The

continued strengthening in private demand is being partly offset by the impact

of fiscal consolidation.

• In Japan, fiscal and monetary policy stimulus is contributing to a rapid

recovery in economic growth.

• In contrast, economic activity in the euro area remains weak.

• In China and other emerging market economies, real GDP growth has

slowed, although it is stronger than in the advanced economies. This is

exerting downward pressure on global commodity prices.

• And, as a consequence, the Bank has downgraded slightly its global growth

forecast.

• The global economy is still expected to pick up in 2014 and 2015.

• In Canada, economic growth is expected to be choppy in the near term,

owing to unusual temporary factors. The overall outlook is little changed from

the Bank’s projection in April.

• Annual GDP growth is projected to average 1.8 per cent in 2013 and

2.7 per cent in both 2014 and 2015, supported by very accommodative

financial conditions.

• Despite ongoing competitiveness challenges, exports are projected to gather

momentum. This should boost confidence and lead to increasingly solid

growth in business investment. The economy will also be supported by

continued growth in consumer spending, while further modest declines in

residential investment are expected.

• Growth in real GDP is projected to be sufficient to absorb the current material

excess capacity in the economy, closing the output gap around mid-2015, as

projected in April.

• Inflation has been low in recent months and is expected to remain subdued in

the near term.

• The weakness in core inflation reflects persistent material excess capacity,

heightened competitive pressures on retailers, relatively subdued wage

increases, and some temporary sector-specific factors. Total CPI inflation has

also been restrained by declining mortgage interest costs.

• As the economy gradually returns to full capacity and with inflation

expectations well-anchored, both core and total CPI inflation are expected to

return to 2 per cent around mid-2015.

• The outlook balances the many upside and downside risks to inflation. Three

of the most important emanate from the external environment, and include the

risks of stronger U.S. private demand, a failure to contain the crisis in Europe,

and weaker growth in China and other emerging-market economies.

• The most important domestic source of risk to the Canadian economy

remains the possibility of a disorderly unwinding of household sector

imbalances.

• Against this backdrop, the Bank today decided to maintain the target for the

overnight rate at 1 per cent.

• As long as there is significant slack in the Canadian economy, the inflation

outlook remains muted, and imbalances in the household sector continue to

evolve constructively, the considerable monetary policy stimulus currently in

place will remain appropriate. Over time, as the normalization of these

conditions unfolds, a gradual normalization of policy interest rates can also be

expected, consistent with achieving the 2 per cent inflation target.

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