Risks to the economy, both upside and downside, appear to have increased, although they remain balanced, according to Paul Jenkins, senior deputy governor of the Bank of Canada.

Speaking today to the Vancouver Board of Trade, Jenkins talked about the importance of flexibility to economic adjustment and, the need to adopt economic policies that promote flexibility in markets for goods, services, capital, and labour.

Apart from his main remarks, Jenkins also discussed the central bank’s current thinking on the economy. He said that in its latest policy statement accompanying an interest rate decision the Bank of Canda, “noted that the global economy has continued to expand solidly, with some moderation in U.S. economic growth but with some further strengthening in the rest of the world. Against this backdrop, commodity prices have remained firm.”

“In Canada, the level of economic activity in the second quarter of 2006 was somewhat below the Bank’s expectations, primarily because of weaker exports. Total and core CPI inflation came in slightly higher than expected in July, mainly because of price strength in the housing and services sectors,” he said. “Nevertheless, all things considered — and here I would include the most recent labour force numbers — the underlying trends in the economy appear to be in line with the broad thrust of our projection for output and inflation in the July Monetary Policy Report Update.”

“We continue to expect that the economy will operate at about capacity through 2008, with total CPI inflation returning to the 2% inflation target in the second half of 2007. In line with this outlook, the current level of the target for the overnight rate is judged at this time to be consistent with achieving the inflation target over the medium term,” Jenkins added.

He pointed out that the key risks to the Canadian outlook for output and inflation over the next few quarters remain those set out in the July Report. “On the upside, they relate primarily to the momentum in household spending and housing prices; on the downside, US household demand could slow more rapidly than expected, thus reducing demand for Canadian exports. While both these risks appear to be a little greater than they were in July, we continue to judge that, overall, risks are roughly balanced,” he concluded. “We will provide a full analysis of economic developments, trends, and risks in our next Monetary Policy Report, which will be published on 19 October 2006.”

As for his main remarks, among other things, Jenkins noted that structural reform in the financial system, “with its vital role in supporting a healthy modern economy, has been and will continue to be a top priority.”

“Here, the ultimate goal should be an innovative, efficient, and sound financial system that can provide specialized financing services competitively. Such a system enhances overall economic flexibility by helping to redirect capital and resources to the most productive uses, in a cost-effective way, following a shock,” he said.

Jenkins stressed that, “Business regulations and standards, including those for the financial sector, need to be harmonized across Canada.”