At the Bank of Canada, we care about potential output for two reasons. First, the growth rate of potential output sheds light on the prospects for our country’s economic growth. Second, the difference between the level of actual and potential output – or the output gap – is a key measure of inflation pressures.
And keeping inflation at the 2 per cent target rate is the best contribution that monetary policy can make to the financial well-being of Canadians. The Bank’s assessment of the current output gap and the projected growth of potential output have a direct bearing on the Bank’s inflation outlook and monetary policy decisions.