Highlights
As expected, the Bank of Canada increased it policy interest rate for the first time since May 2006. It increased its interest by a quarter of a point or 25 basis points to 4.5 percent. While inflation has remained within the Bank's 1 percent to 3 percent target range, employment has soared thanks to the resource boom in the Western part of the country. The Canadian dollar has climbed 45 percent in five years and is nearing parity with the U.S. dollar for the first time since 1976. However, manufacturers, who export about half of what they produce, have lost 289,000 workers, or 11 percent of their workforce, since April 2004 as the climbing currency has made Canadian goods more expensive.

In its statement, the Bank said
"Economic growth and inflation in Canada in the first half of this year have been stronger than expected in the April Monetary Policy Report (MPR). Final domestic demand has remained the key driver of economic growth in Canada, bolstered by firm commodity prices. The Bank judges that the economy is now operating further above its production potential than was projected at the time of the April MPR. Both total CPI and core inflation have been higher than projected in April and are above the 2 per cent inflation target. Longer-term interest rates have increased and the Canadian dollar has appreciated sharply, moving well above the trading range assumed in the last MPR.

"The Canadian economy is now projected to grow by 2.5 per cent in 2007, somewhat stronger than was expected in April, and to grow somewhat more slowly in 2008 and 2009 than previously projected. In this new projection, higher interest rates across the yield curve and a higher assumed range for the Canadian dollar of 93 to 95.5 cents U.S. act to moderate growth in 2008 and 2009 to an average of about 2 1/2 per cent. This brings aggregate demand and supply in Canada back into balance in 2009.

"Inflation is projected to be slightly higher and more persistent than in the April MPR. However, as excess demand diminishes, total CPI and core inflation should decline to 2 per cent by early 2009.

"There are both upside and downside risks to the Bank's inflation projection. The main upside risk is that household demand in Canada could be stronger than expected. The main downside risks are related to the higher Canadian dollar and the ongoing adjustment in the U.S. housing sector. In the context of the Bank's new projection, these risks appear to be roughly balanced.

"In line with this outlook, the Bank is raising the target for the overnight rate to 4 1/2 per cent. Some modest further increase in the overnight rate may be required to bring inflation back to the target over the medium term.

"An analysis of the Bank's outlook for growth and inflation, including economic and financial developments and risks to the projection, will be set out in the Monetary Policy Report Update, to be published on 12 July 2007."