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This Report presents the Bank of Canada’s assessment of the trend of inflation in Canada and explains the monetary policy actions deemed necessary to keep inflation within the Bank’s inflation-control target range.

We study the importance of supply constraints in explaining the heterogeneity in house price cycles across geographies in the United States.

In 1996 inflation remained within the Bank’s target range but was subject to downward pressure. The low rate of inflation contributed to a major easing in monetary conditions, and interest rates reached their lowest level in 30 years.

In the year just ended, the global economy faced a number of exceptional challenges, reflecting a wide range of economic, financial, and geopolitical risks and uncertainties. These included the fallout from the September 2001 terrorist attacks, corporate accounting scandals, stock market volatility, and developments in the Middle East. Despite this global backdrop, the Canadian economy outperformed virtually all other industrial economies, growing by about 3 1/4 per cent and creating 560,000 jobs, while inflation expectations remained well anchored to the Bank of Canada’s 2 per cent inflation-control target.

The Canadian economy continues to grow at a solid pace, consistent with the Bank’s outlook in the January Monetary Policy Report Update.

In Canada, temporary workers account for 14 per cent of jobs in the non-farm business sector, are present in a range of industries, and account for 40 per cent of the total job reallocation. Yet most models of job reallocation abstract from temporary workers.

This is the second in a series of semi-annual reports designed to increase the transparency and understanding of Canadian monetary policy.

Growth in the Canadian economy has been essentially in line with the expectations set out in the Bank’s January Monetary Policy Report Update.

Canada’s inflation-control targets establish a specific medium-term objective for monetary policy.

Over the last six months, most countries have continued to register strong economic growth.