David Dodge, governor of the Bank of Canada, indicated in a speech today that the central bank’s economic outlook remains little changed.

Speaking to the Chambre de commerce du Montréal métropolitain and the Fédération des chambres de commerce du Québec in Montréal today, Dodge said that since the Bank’s last rate setting a number of Canadian economic indicators have also been published. “Some of these indicators have been stronger than expected, others have been weaker. But on balance, the projection we set out in our April Monetary Policy Report appears to be reasonable. That is to say, we continue to expect economic growth roughly in line with the growth of potential output, and inflation to average close to the 2% target in 2007 and 2008,” he said.

“We will continue to monitor all economic and financial developments in the global and domestic economies relative to the projection in the April Report. But it is important to remember that when it comes to setting monetary policy, the Bank always tries to develop a complete picture of the economy. We do not react unduly to any individual piece of information,” Dodge stressed. “Rather, we put all the pieces together to get to the underlying trends in the economy. And, as always, we will look at the complete economic picture as we lead up to our next decision date on 11 July, and we will present that complete picture in our Monetary Policy Report Update two days later.”

The rest of the speech was devoted to the experience of Canadian business in adjusting to developments in the global economy. He suggested that policymakers must ensure that the economy is as flexible as possible to react to global shifts.

Recent significant developments in the global economy include the rise of China and India as economic powerhouses, strong global economic growth, monetary tightening by a number of the world’s central banks, and the large global imbalances, principally between the US and Asia.

“These developments have had significant consequences for the Canadian economy,” Dodge noted. “It is clear that we must all adjust to these developments and be ready to take advantage of the opportunities presented by the strong global economy.”

“Despite all the challenges, we are seeing businesses across the country being inventive in responding to the necessity of adjustment,” he said.

To facilitate that adjustment, Dodge said that governments can support both public and private investment in infrastructure, adopt policies to promote economic flexibility, and policies that allow Canadian capital markets to work at peak efficiency. “As I have said before, we need policies that do not impede efficiency in our financial institutions and markets, and at the same time encourage competition. This is crucial, not only because it allows firms to have appropriate access to capital, but also because financial services is a high value-added industry that makes a large contribution to employment and income, particularly here in Montréal,” he added.

As for monetary policy, he said, “We keep inflation in check by trying to have the economy operate at full capacity, with aggregate supply and demand in balance. In doing so, we help the adjustment process because resources that are released by sectors under pressure can be more readily absorbed by sectors that are expanding. We see clear evidence of this process happening right now in Canada.”

In terms of formulating monetary policy, Dodge said that exchange rate movements related to changes in demand for goods and services would require little, if any, monetary policy response. He added that most of the appreciation of the Canadian dollar since 2003 — but not all — appears to have been related to increased demand for Canadian goods and services. Some of the appreciation has also reflected the broad-based weakness of the U.S. dollar associated with global current account imbalances, he explained.