Highlights
As expected, the Bank of Canada increased its key interest rate by 25 basis points to 3 percent. It had rested at 2.5 percent since October 19, 2004 before increasing to 2.75 percent in September. The Canadian economy is operating at close to full capacity, and economic data are strong. For example, second quarter GDP was much higher than the Bank had forecast. The impact that will radiate out from the U.S. to Canada from Katrina is as yet unknown. Canada is a net energy exporter to the U.S. and has increased oil production in response to an international request.

In its statement, the Bank said "The global and Canadian economies have continued to grow at a solid pace. At the same time, there have been significant movements in energy prices and the Canadian dollar has traded in a higher range against the U.S. dollar and other major currencies. Overall, the Canadian economy now appears to be operating at its full production capacity.

"The Bank projects that the Canadian economy will continue to operate at about its production potential through 2007. CPI and core inflation are projected to be 2 percent in the second half of 2006, although CPI inflation is expected to average near 3 percent until then, boosted by high energy prices. Short-term risks to this projection appear to be balanced. But as we look further out to 2007 and beyond, there are increasing risks that the unwinding of global economic imbalances could involve a period of weak global growth.

"In line with the Bank's outlook, and given that the Canadian economy now appears to be operating at capacity, some further reduction of monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters, and to keep inflation on target. However, with the risks to the global outlook tilted to the downside as we look to 2007 and beyond, the Bank will monitor international developments particularly closely. More generally, the Bank will continue to assess the adjustments and underlying trends in the Canadian economy, as well as the balance of risks, as it conducts monetary policy to keep inflation on target over the medium term.

"The details of the Bank's outlook for output and inflation and an analysis of the risks and uncertainties related to this outlook will be discussed in the Monetary Policy Report, to be released on 20 October 2005."