Canada’s economy is running more or less in line with expectations, although growth has been a bit weaker than expected, according to Pierre Duguay deputy governor of the Bank of Canada.

Speaking to the Canadian Association for Business Economics in Kingston, Ont., Duguay noted that the Canadian economy continues to adjust to major global developments. In the Monetary Policy Report Update, released last month, the economy was judged to be operating just above its production capacity and was projected to return to capacity by the end of 2008, he said, adding that the level of the policy interest rate was judged, at the time, to be consistent with achieving the inflation target over the medium term.

CPI inflation was expected to return to its 2% target in the second half of 2007. Core inflation was projected to remain at 2% throughout the projection period.

“In our update, we said that the upside risk to Canadian output and inflation related primarily to the momentum of household spending and housing prices. It was judged to be roughly offset by the risk that the U.S. economy would grow more slowly than expected, thus reducing demand for Canadian exports,” he recalled.

“Information received since July suggests that real GDP growth for the second quarter may have been slightly weaker than anticipated in our Update. But the underlying trends in the economy appear to be in line with the broad thrust of our July projection in terms of both output and inflation,” Duguay said.

“Finally, with the recently released July CPI now showing the effect of the 1% reduction in the GST, I would like to remind you that, in setting monetary policy, the Bank’s approach continues to be to look through any direct impact on inflation from changes in indirect taxes. In this context, core CPI, which excludes the effect of changes in indirect taxes, is an important indicator of the underlying trend of inflation,” he added.