Highlights
As expected, the Bank of Canada left its key interest rate at 4.25 percent. The Bank had increased rates by 25 basis points to this level on May 24, 2006. Third quarter gross domestic product was up 0.4 percent and 2.5 percent when compared with the same quarter a year ago. Continued strength in business investment, non-residential structures and equipment, and a rebound in exports contributed to that quarter's growth. But geographically, growth has been stronger in the commodity intensive west rather than the industrial east. This can pose a problem for the Bank of Canada in determining interest rates.

In its statement, the Bank said that

"Global economic expansion has remained robust, although economic growth in the United States slowed during 2006. With weaker U.S. growth, output growth in Canada decelerated, likely averaging about 1.6 per cent in the second half of 2006. This was largely due to reduced U.S. demand for building materials and motor vehicles - which has adversely affected Canada's exports - and to the need for Canadian businesses to adjust inventories. Final domestic demand in Canada has continued to contribute strongly to growth. Inflation has evolved largely in line with the Bank's expectations in the October Monetary Policy Report (MPR), with total CPI inflation slightly lower than projected and core inflation slightly higher. The Bank judges that at the end of 2006, the Canadian economy was operating at, or just above, its production capacity.

"There are signs that a significant amount of the adjustment in the U.S. housing and automotive sectors has already taken place and that the inventory correction in Canada is well advanced. Accordingly, the Bank projects that economic growth in Canada will pick up to about 2 1/2 per cent in the first half of 2007, and that the economy will continue to operate near its production capacity throughout 2007 and 2008. Total CPI inflation should average just above 1 per cent in the first half of 2007, returning to the 2 per cent inflation target in early 2008. Core inflation should return to 2 per cent in the first half of 2007 and remain there. The Bank continues to judge that the risks to the inflation projection are roughly balanced, but the main upside and downside risks outlined in the October MPR have diminished somewhat. In line with the Bank's 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."