Highlights
As expected, the Bank of Canada left its policy interest rate at 4.25 percent for the 12 time. The Bank last increased its rate in May 2006 when it raised it to its current level. 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

"Growth of the Canadian economy has been essentially in line with the Bank's expectations as set out in the January Monetary Policy Report Update. But inflation has been higher than expected. Pressures on capacity over the past year have been stronger than previously judged. Also, food and gasoline prices have recently risen more than expected. After considering the full range of indicators, the Bank now judges that the Canadian economy was operating just above its production capacity in the first quarter of this year.

"Robust domestic demand continues to support Canada's economic growth. Stronger-than-expected growth outside North America has led to rising demand for, and prices of, many commodities. However, the slowing U.S. economy has had a moderating effect on growth in Canada.

"Over the projection horizon, domestic demand is the main driver of growth in Canada. With the U.S. slowdown now expected to be somewhat more prolonged than previously projected, net exports should exert a slightly greater drag on growth in 2007. The Canadian economy is projected to grow by 2.2 per cent in 2007 and 2.7 per cent in both 2008 and 2009, returning to its production capacity in the second half of 2007 and remaining there through 2008 and 2009. Core inflation is projected to decline to 2 per cent by the end of 2007. Total CPI inflation is projected to rise above the 2 per cent inflation target in the second half of this year, before returning to the target by mid-2008.

"The upside risk to the Bank's inflation projection is that the recent strength of inflation could be more persistent than projected. The downside risk continues to come from the possibility of a more pronounced slowdown in the U.S. economy. The Bank continues to judge that the risks to its inflation projection are roughly balanced, although there is now a slight tilt to the upside."