Monetary Policy Report Update - July 2003

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Since the April Monetary Policy Report, there have been a number of unanticipated developments that have changed the outlook for inflation and economic activity in Canada. Both inflation and inflation expectations have declined more rapidly than the Bank had expected. Near-term domestic activity has been undercut by the effects of severe acute respiratory syndrome (SARS) and an isolated case of bovine spongiform encephalopathy (BSE) in Canada. Foreign demand for Canadian products has also been weaker than earlier anticipated. As well, the substantial rise in the value of the Canadian dollar against the U.S. dollar will have a dampening effect on the future growth of demand for Canadian goods and services and will contribute to downward pressure on the prices of some components of the CPI.

In this context, inflation pressures have eased, more slack is developing in the economy than had been expected, and the output gap at the end of 2003 will be larger than projected in the April Report. It now appears that core inflation will fall below the 2 per cent target by year-end.