The economy has been weaker than expected, as the U.S. slowdown has hung on longer than expected, says David Dodge, governor of the Bank of Canada. “Since late last year, the pace of economic expansion in Canada has slowed substantially, mainly because U.S. demand for our products has been much weaker than anticipated. Canadian manufacturers, particularly of motor vehicles, electronic products, and telecommunications equipment, have had to make very significant adjustments.”

However, he noted that domestic demand has held up, and that the Bank continues to expect a second half rebound. Dodge made the comments during a speech to the Edmonton Chamber of Commerce, today.

“As we look ahead, we see domestic demand in Canada continuing to grow, supported by the easing that has taken place in monetary conditions, the recent tax cuts that are boosting disposable incomes, gains in employment, and the projected completion of the current inventory adjustment. We also continue to see U.S. demand growth picking up in the second half of 2001, given substantial reductions in interest rates, relatively high levels of consumer spending, the expected end of the inventory correction, and recently announced tax cuts, which include rebates beginning in July .” But he noted that there is a risk that the U.S. stays down longer due to the ongoing weakness in U.S. capital investment.

Dodge also pointed out that total CPI inflation has recently been above the top of the Bank’s 1% to 3% target-range. “Total CPI inflation will probably remain volatile over the next couple of months, before moving down to about 2% by the end of the year, if world prices for crude oil and natural gas stabilize around current levels,” he said. But he
conceded that “the Bank will need to stay alert to any signs of energy costs spilling over into other consumer prices, and thus putting upward pressure on the trend of inflation. In light of these risks, the Bank will have to continue to monitor the situation very carefully.”

Dodge said the Bank continues to expect that the economy will grow by between 2% and 3% this year, returning to a somewhat higher growth path in 2002.

Dodge reiterated the bankÕs commitment to floating rates, as an important part of monetary policy. “One may not argue that, for all time and under all circumstances, a floating currency will be the right solution for Canada. But, what I can say is that, given the structure of our economy, for now and for as far into the future as I can see, the
advantages of a flexible exchange rate, anchored by a domestic inflation target, clearly outweigh the benefits of a currency union. And they will certainly always outweigh those of a peg. I hope that I have made it clear today that Canada’s monetary policy approach of a flexible exchange rate, anchored by an inflation target, works. There is no need to fix it.”