(May 1 – 13:40 ET) – The Bank of Canada continues to call for the economy to rebound in the second half of 2001. The bank reiterates its opinion in its thirteenth semi-annual Monetary Policy Report, which was released today.

In the report, which is published every May and November, the bank says, “At this time, the key issue in the conduct of monetary policy in Canada is the extent of the current slowdown in the pace of economic activity stemming primarily from developments in the United States.”

The central bank concedes that the slowdown in the U.S. has been greater than anticipated, but it sticks to its call for a strengthening in the second half of 2001. “After slowing in the first half of 2001, economic growth in Canada is expected to pick up in the second half and rise somewhat further in 2002 to slightly above the economy’s growth potential. This view reflects several factors: a second-half pickup in U.S. growth, completion of the current inventory correction, continued investment in new technology by businesses, recent tax cuts, and the easing in domestic monetary conditions.”

The bank hints that further rate cuts may be in the cards. It notes that the cuts totalling 100 basis points already this year are consistent with the bank’s goal of keeping inflation close to the 2% midpoint of its 1% to 3% target range. Based on its prediction that slowing activity and a movement towards excess supply will result in core inflation below 2% over the remainder of 2001, it can be expected that the Bank is open to further cuts.

In its report, the bank states that inflation is expected to move back to 2% by the end of 2002 as the economy grows above potential. The rate of increase in the total Consumer Price Index is expected to be volatile over the next few months, before moving down to 2% by the end of 2001 if world energy prices remain close to current levels.

“The main risk to this outlook for the Canadian economy is the timing and strength of the projected pickup in U.S. growth. The bank will continue to monitor developments in this area closely,” it notes. “Europe continues to exhibit positive momentum although at a slower pace. Emerging-market economies have been adversely affected by the U.S. slowdown. In Japan, the economy remains weak.”