Thank you very much, Mr. Chairman.
It's a real pleasure to be back at this committee. It's been a year since we've been here, so I want to say that we do appreciate your taking the time to meet with us, and hopefully we'll be back on track, meeting twice a year, at the time we release our monetary policy reports. We think this is an important way to keep you informed and, through you, to keep the Canadian public informed of the bank's view on the economy and about the objective of monetary policy and the actions we're taking to achieve it.
When we appeared before this committee last October, we noted at that time that the global and Canadian economies were continuing to grow at a solid pace and that our economy appeared to be operating at full capacity. In our last monetary policy report, which we released this morning, we judged that the Canadian economy is currently operating just above capacity. While global economic growth is expected to be a little higher than we had previously anticipated, a weaker near-term outlook for the U.S. economy has curbed near-term prospects for Canadian exports and growth. The bank's outlook for growth in the Canadian economy has been revised down slightly from what we outlined in our July monetary policy report update.
The Bank's base-case projection now calls for average annual GDP growth of 2.8% in 2006, 2.5% in 2007, and 2.8% in 2008. Weakness in labour productivity growth has lead the Bank to lower its assumption for potential growth to 2.8% for the 2006-08 period. Together, these factors imply that the small amount of excess demand now in the economy will be eliminated by mid-2007.
Core inflation is expected to move a bit above 2% in the coming months but return to the 2% target by the middle of 2007 and remain there through to the end of 2008. Lower energy prices have led to a downward revision of the near-term projection for total CPI inflation. Total inflation (which includes the temporary impact of the GST reduction) will likely average about 1.5% through the second quarter of 2007, before returning to the 2% target and remaining there through to the end of 2008.
Mr. Chairman, as we noted at the time of our interest rate announcement on September 6, the risks around this base-case projection, which I've just gone through, are judged to be a little greater than they were at the time of our July update. The main upside risk relates to the momentum in household spending and housing prices here in Canada, while the main downside risk is that the U.S. economy could slow more sharply than expected, leading to lower Canadian exports. The bank judges that these risks to its inflation projection are roughly balanced.
Finally, I just note that on Tuesday we left our key policy rate unchanged at 4.25%. The current level is judged at this time to be consistent with achieving the inflation target over the medium term. We at the bank will continue to pay close attention to the evolution of these risks, as well as to economic and financial developments in the Canadian and global economies.
Mr. Chairman, that's a very quick overview. Paul and I now would be very happy to answer your questions.