The economy has been operating above its estimated production potential, but is expected to decelerate noticeably in the short term as lower external demand and the marked currency appreciation damp activity. Yet growth is likely to rebound quite rapidly once the effects of these international factors disappear. A slowing in commodityprice increases, the federal goods and services tax cut and the stronger Canadian dollar should contribute to a temporary decline in inflation.
With large uncertainties as to the international environment, the Bank of Canada should hold its interest rate constant for now. As these uncertainties dissipate and the just-announced tax cuts take hold, the Bank should stand ready to raise rates, with the timing dependent on incoming information. Fiscal settings at all levels of government need to remain prudent, and windfall gains from non-renewable resource rents should be set aside to prepare for the looming spending effects of ageing.
©OECD Observer No. 264/265, December/January 2008
• OECD Economic Outlook No. 82, December 2007 - Preliminary version
• Visit www.oecd.org/canada
• All OECD Observer articles on Canada