Bank of Canada - Annual Report 2006

"At the same time, variability in energy prices meant some sizable swings in the consumer price index. Inflation moved from a high of 2.8 per cent in January to a low of only 0.7 per cent in September. The core rate of inflation opened 2006 somewhat below 2 per cent, but by the autumn, had moved just above 2 per cent. This rise in core inflation was consistent with an overall economy that was operating slightly above the limits of its capacity. Against a background of increasing pressures on capacity through the first half of the year, the Bank raised its policy interest rate (the target for the overnight interest rate) on four occasions. That brought the target rate to 4.25 per cent by July, where it remained through the balance of the year. In the second half of the year, we judged that the principal upside risks to our outlook for inflation were related to the momentum in household spending and housing prices, while the main downside risk was a sharper slowdown in the U.S. economy than was previously expected. These risks were seen to be roughly balanced.

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