March 23, 2001
1. Since the staff report (SM/01/81) was issued, some additional data have become available on the current economic situation in Canada. The unemployment rate remained unchanged in February at 6.9 percent, following a slight rise in January; employment, however, declined in February, after posting only a modest rise in January. Most of the decline was accounted for by the manufacturing sector. A substantial fall in the participation rate in February kept the unemployment rate from rising. Also in February, core consumer price inflation remained unchanged at 2 percent (12-month rate), the mid-point of the official target range of 1–3 percent. The overall CPI declined slightly to 2.9 percent, largely reflecting lower energy prices. Growth in retail sales remained strong in January, rising by 0.6 percent, broadly in line with the growth experienced in the closing months of 2000.
2. The most recent consensus forecast for Canadian GDP growth in 2001 has been reduced from 2¾ percent in February to just under 2½ percent in March, broadly in line with the staff’s forecast. However, uncertainty regarding prospects for the Canadian economy has increased, particularly as the risk of a more pronounced downturn in U.S. economy activity appears to have risen in light of the events of the past couple of weeks. Notwithstanding these developments, the thrust of the appraisal in the staff report remains unchanged. In particular, monetary policy should be the main instrument used in attempting to sustain the economic expansion, and the authorities will have to be flexible, poised to act promptly and firmly to lower interest rates should indications of an excessive slowing in Canadian economic activity begin to emerge. The Bank of Canada reduced interest rates by 50 basis points to 5¼ percent on its scheduled monetary policy announcement date of March 6, 2001. The next scheduled monetary policy announcement date is April 17.
3. Following the recent Canadian and U.S. interest rate cuts, short-term yields on Canadian government securities declined, but they continue to slightly exceed those in the United States. The differential for long-term yields has widened from about 25 basis points in late February to about 40 basis points in mid-March. The Canadian dollar has depreciated from about 65½ U.S. cents in late February to 63¾ U.S. cents in mid-March, partly reflecting the continued weakness of non-energy commodity prices in early 2001.