Source: The Canadian Press

The Bank of Canada is establishing its own commodity price index to help improve its forecasting and inflation targeting.

Deputy governor John Murray announced the index in speech on the importance of commodities to Canada’s economy in Edmonton on Thursday.

Murray said the index would be unveiled by the bank on Friday.

“The price of commodities in Canada has important implications for the economy and the interpretation of developments in commodity markets is important to the conduct of monetary policy,” he told an audience at the University of Alberta in prepared remarks.

Notes of the address were released to media in Ottawa.

Murray gave no details about the new index, but said it would incorporate new methodology that “will be more accurate, representative and flexible.”

The bank does not do its own forecasting of future prices for commodities like oil, or even the value of the Canadian dollar, although both are connected and are critical to economic forecasting.

Murray explained the bank bases its projections based on futures markets, under the assumption that those who buy and sell commodities have an idea where they are headed.

But, he admitted, commodity prices are “inherently volatile” and all forecasters have faced the same challenge.

The bank has often revised its estimates for commodities and the loonie, particularly in the past few years when the global economy went from a sustained growth period into recession and back to recovery.

In his address, Murray noted that commodities represent 10% of Canada’s gross domestic product and 45% of export sales.

Canada’s economy has done as well as its commodity sector, Murray noted, saying that the bank’s April forecast is for global growth to continue to boost oil and gas prices modestly over the next three years.

Non-energy commodities, such as base metals, are expected to gain about 30% in value over the period.

The central bank estimated last month that growth would average 3.7% this year and 3.1% next year.

With China and India expected to grow at between eight and 10%, the deputy governor said it would be tempting to assume that commodity prices will keep rising.

But he added: “If history is any guide, continuous rapid upward movement in real prices … is unlikely. History suggests … don’t count our chickens before they hatch.”