The Canadian economy continues to adjust to major global developments. These include a marked recovery in world economic growth and an associated increase in commodity prices; the growing global presence of major emerging-market economies such as China and India; and a realignment of world currencies, including the Canadian dollar. Canadian monetary policy is facilitating the adjustment by aiming to keep inflation at its 2 per cent target and the economy operating near its production capacity.

Early in the year, with core inflation below target and excess supply in the economy, the Bank lowered its target for the overnight interest rate to 2 per cent to support growth in domestic demand. Given the appreciation of the Canadian dollar in 2003, the Bank did not expect net exports (the difference between exports and imports) to make a material contribution to growth in aggregate demand in 2004 and 2005. But, in fact, in the first half of this year, exports grew much more vigorously than anticipated. As a result, the Canadian economy has moved up near its production capacity sooner than was projected in either the April Monetary Policy Report or the July Update.

MPR Summary - October 2004