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Monetary Policy

Decision-making process

Staff economic projection

The staff economic projection is the first analysis presented to the Governing Council. It is the staff's assessment of the most likely path for the economy — the "base-case projection." It includes a recommendation to the Governing Council on the appropriate level for the key policy rate so as to keep inflation near the 2 per cent midpoint of the inflation-control range.

The staff projection is organized around the quarterly national income and expenditure accounts, which are the most comprehensive measures of economic activity. It is the reference point from which the implications of other sources of information are assessed.

International developments

The projection exercise begins by looking beyond Canada's borders. The Bank's International Department assesses developments and future prospects in overseas economies, drawing on the analyses and forecasts of the International Monetary Fund, the Organisation for Economic Cooperation and Development, and private sector forecasts.

Near-term prospects for Canada's economy

The second step is a detailed analysis of the current state of the Canadian economy and its near-term prospects. This includes high-frequency indicators, such as car sales, housing starts, employment, manufacturers' shipments, retail sales, and merchandise trade.

High-frequency data must be handled with care. These data are extremely volatile — because of short-term factors, such as labour disruptions, unusual weather, and special promotions such as sales or financing incentives — and are subject to large revisions. A key challenge is to figure out whether the latest movement in the data simply reflects short-term volatility or is indicative of the direction in which economic activity and prices are headed.

The economic model

The projection combines the above information with a structural macroeconomic model of the Canadian economy. The model helps trace the link from the target for the overnight rate to inflation. It also highlights the very indirect nature of the Bank's influence on inflation and the fact that this influence becomes apparent only over time.

Following the presentation of the projection, the Council meets and begins to discuss its views about the most likely path for the economy and the main risks and uncertainties around the outlook.

Next: Major briefing