Governor Dodge Discusses the Implications of Demographics on Monetary Policy

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FOR IMMEDIATE RELEASE
13 June 2007
CONTACT: Jeremy Harrison
613 782-8782
ST. JOHN'S, NEWFOUNDLAND AND LABRADOR Demographic trends and the effect of Canada's aging population have begun to have an impact on the Canadian monetary policy, Bank of Canada Governor David Dodge said today.
In a speech to the St. John's Board of Trade, Governor Dodge said the Bank has begun to take into account the fact that the leading edge of the baby boom generation is starting to retire. The aging of Canada's population will mean a slowdown in the growth of "trend labour input" the growth in the number of hours worked in the economy which has implications for the conduct of monetary policy.
"Declining growth in trend labour input implies lower growth of potential output," Governor Dodge said. "And if the trend rate of productivity growth remains unchanged, this means inflationary pressures can begin to build at a lower rate of economic growth."
The Governor went on to note that both economic growth and inflation had been stronger than the Bank expected at the time of the April Monetary Policy Report. As well, the Canadian dollar has traded in a higher range than assumed. "Much of this appreciation can be linked to factors such as the strength of demand for Canadian goods and services, continuing firm prices for commodities, and a positive outlook for Canadian economic growth," Governor Dodge said. "But the overall response of the Canadian dollar to these factors appears to have been stronger than historical experience would have suggested."
"There is an increased risk that future inflation will persist above the 2 per cent inflation target," said the Governor. "Some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target."
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Governor Dodge Discusses the Implications of Demographics on Monetary Policy

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