Economic outlook has improved significantly

The Bank of Canada released its semi-annual Monetary Policy Report on Wednesday.

The report hints that interest rates will likely have to climb to achieve the central bank’s 2% target for inflation control.

“Canada’s economic outlook has improved significantly since the November Monetary Policy Report,” it says. “Indeed, information on the fourth quarter of last year and the first quarter of 2002 indicates that the recovery in the Canadian economy began sooner and has been considerably stronger than anticipated.”

The Bank now projects that the Canadian economy will grow between 3.5% and 4.5% at annualized rates in the first half of 2002. “It is expected to continue to expand at a rate above that of its production capacity in the second half of 2002 and in 2003. Thus, the economy is expected to be operating at full capacity in the second half of 2003,” the Bank says.

Risks remain on both the upside and the downside, it suggests. ” Given the amount of monetary stimulus in place, growth in Canada could be stronger than projected. It is also possible that growth in household spending may not be as strong as anticipated … There is also uncertainty regarding the timing and strength of the pickup in business investment and exports, and how developments in the Middle East could affect crude oil prices and the global economy.”

Apart from the risks, the Bank sees rates going higher. “The challenge for monetary policy over the remainder of this year and through 2003 is to help the economy move back to, and then sustain, levels of production at capacity by taking actions aimed at achieving the Bank’s 2% target for inflation control. This means reducing, in a timely and measured manner, the substantial amount of stimulus in place.”