The Canadian economy will grow at a slightly slower pace this year than previously thought, the Bank of Canada said today.

That suggests that interest rates will remain low for some time.
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In its latest Monetary Policy Report, the Bank of Canada says that that the outlook for the Canadian economy continues to be shaped by global developments, including the realignment of world currencies. “The near-term outlook for the global economy is a touch weaker than projected in the October Report, but more solidly based because of somewhat lower oil prices and greater confidence in the momentum of the U.S. economy,” it explains.

The Canadian economy is expected to operate a little further below its full production capacity in 2005 than was anticipated at the time of the last report, the bank adds, “largely reflecting the dampening effects on aggregate demand of the recent appreciation of the Canadian dollar”. Growth in the second half of 2004 was about 2.75%, and just 2.25% in the fourth quarter, the Bank estimates.

The central bank projects real GDP growth to average a little less than 3% in 2005, implying some increase in excess supply. The core rate of inflation is projected to average just above 1.5% in the first half of 2005, before gradually rising to the 2% target around the end of 2006.

For 2006, growth is projected to pick up to slightly more than 3%, consistent with returning the economy to its production capacity in the second half of the year, and returning core inflation to 2%. “In line with this revised outlook, the pace of reduction in monetary stimulus is likely to be slower than that envisioned in the October Report,” it adds.

The Bank says that its outlook is subject to both upside and downside risks and to uncertainties. “While the near-term risks surrounding the global economic outlook have lessened, there are still significant medium-term risks related to the evolution of oil prices, the pace of expansion in China, the way in which current account balances in the United States and East Asia will be resolved, and geopolitical developments,” it says.

http://www.bank-banque-canada.ca/en/press/2005/pr05-2.htm