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. Fourth quarter gross domestic product was up 0.4 percent and 2.3 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 its outlook for output and inflation remains essentially unchanged.

"The Canadian economy is expected to continue to operate near its production capacity through 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 target in 2008. Core inflation should remain near 2 per cent throughout this period.

Despite recent volatility in global financial markets, the Bank continues to judge that the risks to its inflation projection are roughly balanced. The main downside risk continues to be that growth in the U.S. economy could be lower than expected. The main upside risk continues to be that household spending in Canada could be stronger than expected, largely because of borrowing against increased home equity.

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."