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October 22, 2014BANK OF CANADA MONETARY POLICY REPORT CONTINUED The Bank of Canada sees economic activity in Canada currently supported by lower Canadian dollar and low interest rates offsetting impact from weak and uncertain global demand. Exports have been gaining traction in line with US economy but household spending continues to represent more than its long-run sustainable share of growth making a shift from consumption to exports and business investment essential. Real GDP growth is projected to average around 2.5 per cent for the next year before slowing to 2 per cent by the end of 2016.
Exports gains have been fairly broad based across sectors and this is expected to continue as foreign activity strengthens and Canadian dollar remains low, but the recovery in the sector will remain weaker than previous business cycle recoveries. Investment spending has been weak with firms waiting for sustained activity before expanding. Healthy corporate balance sheets, financing conditions, and an aging capital stock support a pick up in investment while weaker commodity prices could weigh on some sectors investment. Housing activity has shown renewed growth as it rebounds from a weather-depressed start to the year and low mortgage rates continue. Existing home sales have increased but provincial markets are diverging with low prices increases and rising inventories, characteristic of a soft-landing, appearing in in Eastern Canada. While major cities in Ontario, Alberta and British Columbia have seen more robust and tighter markets that are mostly inline with their demographic and employment situations.
The Bank of Canada expects that Canadian economy will return to full production capacity in the second half of 2016, at which time inflation is expected to be about 2 per cent on a sustained basis. In the interim, the effect of a lower Canadian dollar on import costs being pass on to consumers will wain and lower energy prices will keep both total and core CPI below 2 per cent in 2015 even as excess capacity in the economy diminishes.
The full report can be found at
Monetary Policy Report - October 2014 and contains box articles on the following: Measuring Capacity through a Business Cycle, Neutral rate of interest in Canada, and Reassessing Potential Output.