Wednesday, November 28, 2007

Our Housing Market Continues to Boom in spite of Recent Economic and Financial Developments

Our Housing Market Continues to Boom under Recent Economic and Financial Developments

In late October the Bank of Canada published its Monetary Policy Report. It was noted, in that document, growth in the Canadian economy has been stronger than projected, supported by the robust global economic expansion and strong commodity prices. Canada's economy is now operating further above its production potential than had been previously expected.

With the economy moving back towards balance, and with the direct effect of the stronger Canadian dollar on consumer prices, core inflation is projected to gradually decline to 2 per cent in the second half of 2008. Total CPI inflation is expected to peak at about 3 per cent later this year and then move back down to the 2 per cent target in the second half of 2008.

But there are a number of upside and downside risks to the Bank's inflation projection. The main upside risk is that excess demand in the Canadian economy could persist longer than projected. The main downside risk is that output and inflation could be lower if the average level of the Canadian dollar were to be persistently higher than the 98 cents U.S. level that was assumed in the Report, for reasons not associated with demand for Canadian products. Given recent information, both the upside and downside risks appear to be greater than they were when we completed the Report.

In the Report, it was stated that after considering all factors, a judgment was made that the risks to the Bank's inflation projection are roughly balanced, with perhaps a slight tilt to the downside. And, that the current level of the target for the overnight rate is consistent with achieving the inflation target over the medium term.

The Canadian and U.S. economies remain highly integrated, and there is every indication that our economic ties will remain strong. But developments in the global economy and the growing prominence of emerging economies have important implications for policy-makers on both sides of the border.

It is important that policy-makers heighten their focus on the need to promote and enhance flexibility. Our economies must be able to adjust to changing circumstances. If we are successful in this effort, not only will both the Canadian and U.S. economies be able to deal with economic shocks, but we will also be able to sustain strong economic performance in North America. And that is the best outcome for Canadians and Americans alike.

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A. Mark Argentino
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