Notwithstanding speculation that the Bank of Canada could move to raise rates early next year, Senior Deputy Governor Paul Jenkins reiterated that the central bank remains committed to its current policy through the first half of 2010.

Speaking to the Vancouver Board of Trade on Thursday, Jenkins noted that there are increasing signs of recovery in many countries, but that “we should expect a protracted recovery, given the financial repair that needs to take place.”

In Canada, growth has resumed too, he said, adding that GDP growth in the second half of 2009 will likely be stronger than projected in the July Monetary Policy Report. “It would appear, however, that some of this stronger growth reflects the effects of temporary factors, such as the impact of the U.S. ‘cash-for-clunkers’ program on Canadian automotive production,” he said; adding that the Bank has reiterated that, “conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.”

In terms of the outlook for inflation, Jenkins said the Bank sees it returning to its 2% target in the second quarter of 2011, although there are both upside and downside risks around this projection. “Upside risks include a faster-than-expected recovery in consumer and business confidence, and further improvements in Canada’s terms of trade. Downside risks are largely external, such as a risk of setbacks in the ongoing repair of the global financial system, and more persistent weakness in foreign private demand,” he said; adding, “All else being equal, a persistently strong Canadian dollar would also reduce real growth and delay the return of inflation to target.”

Jenkins noted that the Bank will assess the balance of risks to inflation in its upcoming October MPR, which will be released two weeks from today.

Apart from the current state of the economy, Jenkins also stressed that policymakers around the world must learn from the financial crisis and recession, and be prepared to address future challenges. “This includes strengthening the Bank’s policy frameworks for promoting both price stability and financial stability,” he said.

“The Great Recession has also drawn attention to the importance of policies that promote economic flexibility and an innovative business environment. It has shown us, once again, how adverse shocks to the Canadian economy often come from outside and thus, why it is essential to continue to develop policies that encourage ready adaptation and adjustment to external developments,” he said.

IE